By: Kaitlyn Templin
In this article we explore the state of M&A within the manufacturing industry and provide dealmakers with our environmental due diligence recommendations.
2016 was another strong year for M&A in the manufacturing industry, and dealmakers in the space remain optimistic this trend will continue throughout 2017. According to the S&P’s Global Intelligence US Middle Market Manufacturing M&A 2016 Report, while deal count was down slightly from 2015, deal value for the industry reached its highest peak in 2016 since 2008. Similarly, Price Waterhouse Cooper (PWC) reported that disclosed deal value rose 3% from $91.3 billion in 2015 to $93.7 billion in 2016 in their Global Industrial Manufacturing M&A deal Insights Report. PWC predicts another banner year for M&A in the industry due to several key speculative factors that include reduced tax rates, infrastructure investment, health care reform, and reduced government regulation.
Similarly, panelists at this year’s ACG Annual Midwest Manufacturing Conference remain optimistic in their predictions for 2017, citing several key trends they expect will have a significant impact on the industry including regulatory reform and increased technological advancements.
Not surprisingly, panelists first pointed to the new political administration as a potential significant driving factor in the industry. A pro-business fiscal policy that comprises a high level of regulatory reform will decrease compliance costs for business owners, leading to increased industry investment. Furthermore, the proposed incentives for US business operations, coupled with increased intellectual property theft abroad and overall international risk, will result in a rise in reshoring and investment in US-based manufacturing.
Next, many of the panelists volunteered that their recent focus has been on the digitization of their operations, indicating that the ability to instantly collect important information and swiftly react to trends will set successful manufacturers apart from their peers in this competitive climate. With an increase in digital connectivity and advancements made in the way of artificial intelligence, panelists estimate that shop floors could soon be completely automated, driving innovation within the industry.
Given the increase in smart manufacturing and expensive capital equipment, the panelists cited a shortage in highly skilled talent and stressed the importance of maintaining a high level of both internal and external workforce training. For example, one panelist explained that it is not about just selling employees on compensation and fringe benefits anymore. It is now essential to connect within the community, selling the business’s story and communicating opportunities for advancement. In fact, this panelist recently dedicated an entire department within his business for furthering employee education. Another panelist explained that his company has solidified relationships with local colleges, educating and training students early on in their careers. As another example of going above and beyond typical compensation and benefits, one panelist said his company is even investigating whether they should invest in an onsite childcare center to attract more female talent.
In summary, dealmakers remain bullish on their outlook for middle market manufacturing M&A in 2017, given the current fiscal and political climate as well as advances in technology. In order to remain successful within the industry, it will be important for business owners to remain flexible and adapt to changing technologies, while also being innovative from a workforce education perspective.
With increased M&A activity in this sector, what trends are we seeing in Environmental Due Diligence?
As we reported in last year’s manufacturing update, we are still witnessing a significant increase in due diligence prior to the period of exclusivity. In fact, 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 better prepared in management meetings. Correspondingly, on the sell-side, businesses are coming to us to get a “leg up” on negotiations and position themselves in the right light to buyers. In order to do this, we perform sell-side environmental evaluations that they can present to buyers in selling materials. Likewise, in instances 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.
In addition, we have seen an increase of third party and community-sponsored “shovel ready” sites within certain states. The term “shovel ready” broadly defines those commercial and industrial sites that have been preemptively prepared, from an environmental and engineering perspective, to attract new businesses by shortening new facility construction time. Programs like these will likely spur additional growth within the manufacturing industry.
The Role of Environmental Due Diligence:
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.