Equipment manufacturing industry mergers and acquisitions guide by Mordechai 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.
Clearly, manufacturing M&A risk is a complex area, so the below gives just a flavour of the various risk areas. Independent advice is crucial to identifying the full range of risks associated with specific deals. However, broadly speaking some of the key risk areas to consider include financial risks, the risk that the target company’s trading position is not as strong as believed, that could be due to reporting errors, unreasonable assumptions linked to financial projections, debt, working capital, and a whole array of other issues.
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 usual pattern is as follows: The larger, better capitalized (PE-backed) regional players invest for cost efficiency, attract the best talent, expand their capabilities and, generally, make life easier for their customers. Infotech and connectivity increase transparency, putting pressure on old relationships. Margins will come under pressure to the point where owners will have to make costly investments to remain competitive — and profitable. But, if you can’t afford to make that investment, it’s a path to eventual trouble. It’s hard to compete at the poker table with the shortest chip stack in the room.
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.
M&A activity in the metal recycling sector is expected to be robust through the remainder of 2021, driven by the economic outlook, industry dynamics, the aging demographic of scrap company owners and tax rate changes. Several factors affect the metal recycling mergers and acquisitions (M&A) market in any given year, with differing positive and negative results. While an infinite number of factors affect the M&A market, those having the most significant influence are, in no particular order, economic outlook, state of the industry (e.g., industry leaders, customer and supplier leverage, scrap metal pricing), company/owner-specific issues (owner transition planning, financial performance) and taxes. In 2021, most factors point to a robust M&A market through the second half of the year. I’ll examine these key drivers and the dynamics influencing an expected shift to a buyer’s market at the end of the year.
Mergers and acquisitions (M&A) among machine shops are in one sense business as usual and in another sense something new. Just like in any other business sector, M&A fluctuations among machine shops are typically driven by economic conditions — conditions such as low interest rates and the availability of “cheap” money; the existence of an economic recovery after a downturn; and favorable stock market conditions that provide capital for M&A activity. What is new is the extent to which acquisitions and consolidation among machine shops seem to be on the rise. As the Baby Boomer generation nears or enters retirement age, many shop owners have no natural successor to turn to. And as machining transitions from regional-focused businesses to shops more and more often serving a national base of customers, small or mid-sized shops often are interested in merging with another company that is better able to manage costly business operations such as accounting or marketing, or able to expand the combined company’s? customer base, capacity and product line.
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? Access-Heat.com 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.