Equipment manufacturing industry consolidation guide from Mordechai Gal

Machinery industry consolidation strategy guide from 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 electronic manufacturing industry M&A, 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.

Other risks in M&A in the machine shop industry include Taxation risks: Issues like historical income tax liabilities, unconventional taxation regimes, and tax carryforwards can all create an M&A risk. Cyber risks: Security risks that could leave the business at risk of cyberattacks and data breaches, as well as any historical incidents that could create future liabilities.

A day does not go by without another announcement of some economic indicator. While assessments can be subjective, the overarching theme is that most global economies are recovering from the COVID-19 pandemic. While recovery might not seem altogether positive, growth is returning and it is generally believed that pent-up demand exists for many products and services around the world. While it might be growth back to where things were, it is growth all the same. The general economic outlook is favorable, which makes it easier for buyers to purchase companies knowing there is time for consolidation and the ability to gain synergies before a market downturn. Across most sectors, corporate and private equity buyers have significant cash available, and the debt markets are standing ready to assist in acquisitions.

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.

The machine shop and electronic manufacturing industry are complex and multi-faceted. With many machine shop owners preparing for retirement, they often find that there is no succession plan in place due to children who prefer to seek independent careers. Because of this, business succession planning becomes a problem many owners face. Operating a machine shop of any kind involves a high level of skill and experience coupled with the need to regularly make large purchases of stock and equipment. Are you in the process of planning to transfer ownership of your business and looking for an investor? AccessHeat 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.