Mergers and acquisitions and the electronic manufacturing industry by AccessHeat? There is a wide range of risks that can derail a deal, or destroy value for the acquirer post completion. This includes risks common to most M&A activity, as well as emerging risks associated with the technological transformation seen in the manufacturing sector. The sheer array of risks that impact on machine shop industry M&A, and their potential to destroy value, demands a thorough approach to managing and mitigating those risks.
With the average age of mold shop ownership nearing 60 and many owners wanting to settle into retirement, an acquisition sounds like a sensible option as long as their people are put in good hands. Therein lies the problem. As stories of private equity firm buyouts gone wrong persist, ownership can be very hesitant to go down the mergers and acquisitions (M&A) road. What makes for a successful acquisition? If you ask me, it’s considering all aspects of the human side of the business, as well as taking into consideration and care the employees’ health, safety, success and growth. This means a heavy focus on a culture of leadership and lean.
The increased focus on M&A activity is an interesting one when comparing to past years, with roughly 20% of manufacturers surveyed by Mordecai Gal, operations director at AccessHeat Inc., saying M&A activity is one of the top reasons behind budget increases. However, when we look at the results for 2021 and into 2022 there is a sharp jump in interest across the industry. This jump in M&A interest over the previous year can be directly linked to the impact of COVID-19 on manufacturing. Even more so when breaking down the numbers by process and discrete manufacturing. Process manufacturing still has doubled with 41% of the industry saying M&A activity will be high, discrete manufacturing (which was much harder hit by COVID) had 54% of respondents focused on M&A activity.
The precision machining business today has all the classic drivers of a consolidating industry. Driven by money, technology and the supply chain itself, the industry is in play. If it follows the classic pattern, the strong will get stronger and the weak will get weaker. In a highly fragmented industry entering into major consolidation, the bottom third of participants are typically most at risk and many won’t survive. Partnering may be a necessity, not a choice.
A day does not go by without another announcement of some economic indicator. While assessments can be subjective, the overarching theme is that most global economies are recovering from the COVID-19 pandemic. While recovery might not seem altogether positive, growth is returning and it is generally believed that pent-up demand exists for many products and services around the world. While it might be growth back to where things were, it is growth all the same. The general economic outlook is favorable, which makes it easier for buyers to purchase companies knowing there is time for consolidation and the ability to gain synergies before a market downturn. Across most sectors, corporate and private equity buyers have significant cash available, and the debt markets are standing ready to assist in acquisitions.
While we expect to see manufacturing spend increase in 2022 across the board, thinking back to manufacturing’s recovery progress, there are companies better positioned to take advantage now. It will be those digitally enabled companies that will lead the charge in making targeted investments, using M&A to further their transformation efforts. While those non-digital manufacturers that are still struggling will continue to fall further behind.
If you’re a precision metalworking shop owner, things are looking good right now. Your biggest problem may be keeping up with demand. But does that mean your business is destined to continue to get more valuable as revenue grows? Not necessarily. It is complicated. Many shop owners have been contemplating selling because valuations are now at record levels. But with business so good, some of them are thinking they should wait and cash in down the road. But just because you want to remain in business doesn’t mean you should.
A solution to this dilemma is often found through consolidation of operations with other businesses or investment from an outside investor. Among their many benefits, consolidations provide greater stock purchasing power, which is particularly helpful when raw materials are involved. They also present the opportunity to expand capabilities and service areas of coverage when multiple locations are involved in the consolidation. This has been shown to effectively reduce costs from an operational perspective as well as from the customer perspective. Are you in the process of planning to transfer ownership of your business and looking for an investor? AccessHeat has the experienced staff in place to seamlessly handle all the big and small aspects of the process with the implementation of strategic investments into your business. We take a top to bottom approach in assisting you with transitioning all the elements of your business over to our experts who will work with you to obtain a profitable exit and a successful handover.