By: Bruce Martin
After a decline in 2013, merger and acquisition (M&A) activity in manufacturing and industrial products sectors grew in 2014 and is expected to continue this trend in 2015. According to the Pricewaterhouse Coopers (PwC) Fourth Quarter 2014 Industrial Manufacturing Industry Analysis:
“Total deal value in the global industrial manufacturing sector soared in 2014, reaching $127 billion, more than 2.5 times the prior year result and among the largest in the history of the sector. Deal value jumped by more than 40 percent over the prior year.”
Strategic acquisitions, which increased 13 percent in 2014, include both public and private companies. These buyers are interested in growing capacity, capabilities, and market share. Private investor acquisitions, which also increased 11 percent in 2014, include both private equity and venture capital buyers. The 2014 increase in M&A was driven by both strategic acquirers and increasingly active private investors, as well as the natural aging population of manufacturing founders and owners.
One of the primary factors contributing to the growth in manufacturing M&A activity is basic economics. As revenue and profits are growing for potential sellers, they are more interested in making a sale in the hopes of an increased valuation based on improved performance. Buyers, at the same time, are feeling more confident as the economy returns to stronger and more stable growth, and as a result are more interested in making a purchase.
The growth in manufacturing M&A is expected to continue to build into 2015 and beyond, especially in the U.S market. According to PwC’s recent U.S. CEO Survey, for the first time in several years, CEOs are seeing the U.S. as an attractive market for business growth in 2015.
“We believe that U.S. manufacturing resurgence will also continue and M&A will be a big part of the industry’s growth prospect going forward.”
The Role of 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 liability or expense in the future.
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 these are clearly understood and quantified so buyers and sellers can optimize the financial terms of your transaction.
As the growth in manufacturing sector M&A continues to build, buyers and sellers will find 2015 an increasingly competitive year for M&A.