Consolidation in the electronic manufacturing industry? 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.
Due diligence is clearly vital and you should investigate all the relevant risks in detail, with close involvement from professional advisers. The process commonly includes a range of different due diligence processes and experts, spanning administrative, financial, asset, HR, environmental and insurance. The aim, ultimately is to identify risks and mitigate them, either through deal renegotiation, warranties provided by the seller, or through specialist insurance products such as M&A insurance.
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 precision machining business today has all the classic drivers of a consolidating industry. Driven by money, technology and the supply chain itself, the industry is in play. If it follows the classic pattern, the strong will get stronger and the weak will get weaker. In a highly fragmented industry entering into major consolidation, the bottom third of participants are typically most at risk and many won’t survive. Partnering may be a necessity, not a choice.
Legal risks: The risks posed by historical, current, or potential legal issues and litigation. Customer risks: Including risks ranging from client contracts, historical warranties, and over-reliance on key clients, to client retention risks post-deal. Strategic risks: The risk that the acquired company will not represent as strong a strategic fit with the buying business as first assumed. Environmental risks: These risks include those associated with previous environmental audits, hazardous substances, pollution, regulatory compliance, potential liabilities, and ongoing investigations.
Disruption brings challenges but also opportunity. Manufacturers that are focused on resiliency and using data to make decisions will be best positioned to succeed. The digital divide has only widened because of COVID-19, this has resulted in many forward-thinking manufacturers to explore potential M&A activity that can accelerate their transformation journey. There will be many undervalued assets available for companies that are able to spend. As manufacturers continue to look for ways to expand into new markets and get closer to customers, the shift to offering products and services will be key. There are challenges that need to be considered when integrating new acquisitions into the business but being in the position to acquire is the first step.
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? 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.