By: Kaitlyn Templin
2015 was a strong year for industrial manufacturing M&A, and dealmakers are optimistic this trend will continue throughout 2016. According to Price Waterhouse Cooper’s (PWC’s) Assembling Value 2015 Manufacturing Industry M&A Analysis Report, deal volume for the industry reached its highest point in a decade, and they report this performance is expected to continue for the remainder of 2016. Indeed, PWC’s Q4 2015 Manufacturing Barometer indicates a 12 percent increase in firms preparing to restructure their portfolio through acquisition or divestiture this year.
Likewise, panelists at this year’s ACG Annual Midwest Manufacturing Conference remain generally optimistic in their predictions for 2016, citing a few overarching trends for industry operations that include mass customization, increased research and development expenditure, a significant improvement in workforce training, and an increased use of analytics.
First, panelists named mass customization a significant driving factor in the industry as consumers continue to seek value through personalization and variety. The way in which businesses interact with their customers is becoming more and more unique, and customization goes hand-in-hand with this trend. The first step in deciding whether mass customization is right for your operation is to estimate what the value would be of a product if it was to be customized. Customization costs more than mass production, but margins can be higher. Panelists reported the key to success is to develop a compelling story for how a particular customization adds value for your consumers. They also specified that a commitment to a high level of customer service is essential, from beginning to delivery, in maintaining brand loyalty.
In our ever-evolving technological world, the panelists also reported an increase in expenditure on research and development in the manufacturing industry. In order to stay ahead of the competition, it will be vital for business owners to commit to constant improvement and complementary product expansion. The average consumer today is more educated and discerning in their choice of one product over another. Therefore, it is important to continuously find ways to make products more convenient, and find new technology to make things easier to use. One way to do this is to make sure the business is only hiring the best and most innovative talent, while also getting these key staff members involved early on with clients and suppliers. When hiring new executives, the panelists recommended finding those who have the ability to take measured risks in technology and only hire those who are prepared to drive the technology of the entire company. Not surprisingly, those companies who are able to achieve mass customization through technology, in addition to global capabilities and differentiated intellectual property, will command higher multiples upon exit. In terms of current investment strategies, the panelists said they are seeking “product poor, customer rich” businesses who will benefit from increased technological investment.
With the influx of millennials entering the workforce, businesses are benefitting from the easier adoption of new technology. The panelists all agreed that millennials tend to be better at being inundated with data and navigating through it, than their older, more traditional-thinking, shop floor counterparts. The panelists believe more expenditure will be allocated to workforce training as new technology is continually created and updated. As such, training programs will have to be continuously evolving, as well as health and safety programs. Furthermore, these experts report that hiring a mostly full-time staff will become more and more critical as outsourced labor has resulted in a decrease in consistency and thus, a fall in quality and customer satisfaction. Business owners should do their best to encourage best practices through training programs, as well as create an atmosphere that breeds loyalty and lifelong learning among their employees.
Finally, the utilization of key metrics and data is sure to play a large role in manufacturing companies’ 2016 strategic plans. Utilizing crucial analytics is very important to maintaining quality and can even improve sales and marketing efforts. The ability to track all customer interactions in customer relationship management tools will allow businesses to monitor their target markets more effectively.
From an investment strategy perspective, the panelists believe financial buyers, as well as strategic, will probably be pulling back a bit on multiples this year, as it is growing harder and harder to be a value buyer in the current auction market. They also foresee a growing number of institutional investors creating close relationships with business owners early on, through the use of minority positions, and increasing their equity stake as they help the existing management team grow organically, as well as integrate bolt-on businesses. This allows investors to demonstrate to management teams that they are adding value before they decide to completely cash-out. Finally, they indicated that dealmakers will continue to spend more time and effort on meticulous due diligence.
With increased M&A activity in this sector, what trends are we seeing in Environmental Due Diligence?
Among our clients engaged in mergers and acquisitions, we are witnessing an increase in buyer due diligence prior to the period of exclusivity. Many of our clients are reaching out to us before they even submit a Letter of Intent, to review materials and perform a high level environmental overview of the target company, so they can be prepared in management meetings. Correspondingly, sellers are becoming better prepared from an environmental perspective. We have recently been performing more environmental evaluations for business owners preparing for divestiture of their business. Likewise, in situations where we are representing the buyer, we have witnessed sellers coming prepared with environmental reports ahead of the due diligence period. In these situations, it is important to review these for completeness and accuracy. Finally, we are observing an increased reliance on representations and warranties, as well as environmental insurance, to increase confidence around what buyers may have been missed during shortened due diligence periods.
The Role of Environmental Due Diligence:
Both buyers and sellers in this industry should waste no time preparing for the continued growth of M&A activity in manufacturing. As always, thorough due diligence, especially in the manufacturing sector, is a crucial element to realizing a successful transaction. In addition to traditional accounting and financial due diligence involved in an M&A transaction, the manufacturing and industrial sectors have several other unique dynamics that should be considered as part of a transaction. For example:
- Operations – To appropriately address operational concerns that could impact a transaction, it is critical to consider key elements of a company’s operations in areas such as manufacturing facility arrangement and organization, LEAN practices, health and safety, and capacity-impacting space constraints. Operational issues such as these are important to understand, especially when a buyer may view them as a considerable potential future liability or expense.
- Environmental – Many manufacturing facilities have long histories of industrial use, and understanding issues of legacy contamination and environmental liabilities can often be complex and time consuming. Thorough environmental diligence is crucial in identifying, quantifying, and managing environmental risks to ensure that these are clearly understood and quantified so buyers and sellers can optimize the financial terms of your transaction.
As the growth in the manufacturing sector M&A continues to build, buyers and sellers will find 2Q 2016 to be an increasingly competitive time for M&A.
EHS Support is an environmental consulting firm with offices across the U.S. and internationally. We offer a range of environmental services including merger and acquisition due diligence services, environmental risk management, remediation services, health and safety consulting, environmental compliance services, and more.