Equipment manufacturing industry consolidation strategy guide by Mordecai Gal? 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 mergers and acquisitions, 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.
Other risks in mergers and acquisitions in the electronic manufacturing industry include Taxation risks: Issues like historical income tax liabilities, unconventional taxation regimes, and tax carryforwards can all create an M&A risk. Cyber risks: Security risks that could leave the business at risk of cyberattacks and data breaches, as well as any historical incidents that could create future liabilities.
Operational risks: For instance the risks associated with fluctuating manufacturing yield, production line equipment and technology, production backlogs and much more. Technology and IP risks: An emerging risk area related to the increased use of technology in manufacturing. These issues include IP ownership, technology licences, use of open source technology in proprietary software, as well as ownership and protection of proprietary designs and processes. Insurance risks: Potential concerns here include adverse claims histories, ongoing claims, insufficient or restrictive cover to name a few. HR risks: Risks associated with employment contracts and practices, ongoing disputes, and potential historical liabilities. Supply chain risks: For instance risks related to material and component supply contracts.
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.