M&A activity is on the rise in manufacturing, but what should buyers watch and how should sellers prepare?
To succeed, a great deal has to be a great fit. As manufacturers take a fresh look at the transaction market, they should also take a fresh look at their businesses. “It starts with strategic planning, where manufacturers should be reflecting on who they are now, who they want to be 5 to 10 years from now, and how they plan to get there,” said Grant Thornton Manufacturing Industry National Managing Principal Kelly Schindler.
Focus first
“We see a lot of manufacturers reflecting on their growth and margin potential, trying to determine how they should focus,” said Grant Thornton Transaction Advisory Market Managing Principal Jeff Bradford. “The day of the conglomerate is behind us, and focus is really important to investors and stakeholders. We’re seeing a lot of larger companies, and even midsize private companies, really taking a hard look at what that strategic focus should be and then pivoting the business towards that.”
Bradford recalled a manufacturer that refocused to create more growth. The company had traditionally manufactured commoditized industrial components. “They determined that their margin pressure was not what they wanted it to be, but they had all the tools and equipment to manufacture higher-value medical components. It’s been a journey to migrate, but it was a very conscious and thoughtful process. They sold off some of the business, invested in clean rooms, and made other moves to completely pivot the business to medical components at much better margins.”
Bradford added that many companies are now reevaluating business models that have gradually shifted over time. “We see a lot of sell-side carve-out work with large companies, where they’re divesting assets that don’t fit their portfolios. It might be that a different regime wanted to invest in those things, or the company made big acquisitions where they now have bits and pieces that don’t fit the future strategy. They’re divesting those assets to get more focus on what they want the business to be.”
With a sharpened focus, manufacturers can look for opportunities that align with their targeted business.
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Align to growth
A sharper focus doesn’t have to limit your business — in fact, it can help you grow in new ways. Grant Thornton Transaction Advisory Services Principal Tom Libeg explained, “A lot of bigger public companies in manufacturing have been challenged with growth, and one historical way to get over that was to do bolt-on acquisitions — figuring that you get some percentage of organic growth and then you get some bolt-on activity. But now, some manufacturers are trying to think of it differently, asking, ‘Where’s my next business or product that’s going to go from a couple million to $50 million?’”
“Maybe that’s not a bolt-on acquisition of an existing company that fits with what they do. Maybe it’s a new technology,” Libeg said. Technology might sound like a big bet that moves away from your focus, but it doesn’t have to be.
“A lot of big companies are making small bets,” Bradford said. “Large manufacturers are looking at small deals, nascent companies, startups and venture-backed companies to partner with on emerging technologies that can be a catalyst and enable the manufacturer’s products. I’ve seen large companies that set aside big deals for a little while, but they made small bets — whether it’s a partnership, joint venture or a full acquisition of a smallish business.” Bradford noted, “Some large manufacturers have internal venture funds that will take a 10–20% stake in an emerging company, and they might want to have options to make a bigger investment as the technology develops.” What kind of small bets are manufacturers making? “I’ve worked on several deals over the last year that weren’t based on a revenue or EBITDA metric,” Libeg said. “The buyer really liked a technology and said, ‘Once we plug this into our organization, we think it can really grow.’”
The development of artificial intelligence (AI) infrastructure has created great potential for many manufacturing companies. AI can be a powerful tool in the back office, but it can also be a rich market for product growth. “The number of data rooms being built, and the equipment that is going into those data rooms, is having an enormous effect on a range of businesses,” Bradford said. “I’ve been at three businesses this week that manufacture things that go into configuring data rooms, all the way down to plastic pieces that connect wires. Products like that are working all the way down to medium-sized and even small manufacturers and having a meaningful impact on their growth trajectory. Some companies that make core products going straight into data room configurations just can't keep up with the demand.”
Manufacturers might need to find nontraditional paths to growth, focusing on a market and then approaching it in innovative ways. So, how do companies find the partners or acquisitions to build that innovative approach?
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Find your targets
Bradford said that the commercial side of your business should help find new opportunities. “Your commercial team is plugged into the market. Corporate development needs to be tied into the commercial side to understand what’s out there, what’s attractive and what’s catalytic to the core business. Your commercial team should know what’s out in the market — what the corporate development and strategy teams should be aware of — to build those relationships and then help evaluate whether an investment is warranted.”
When you consider targets, also consider investments other than a merger or acquisition. Grant Thornton Transaction Advisory Managing Director Tim Douek said, “We often see really confident startups, or companies that are four to six years in and starting to see pretty impressive valuations, but they still feel there’s more work to be done. In those situations, they might be looking for an infusion of cash from a strategic partner, but not for somebody to buy them lock, stock and barrel, swapping out management teams and changing the business.”
However, some target companies are still looking for traditional buyers. “Some companies are really ready to sell a piece of their business, or sell the whole business, because they feel they’ve taken it as far as they can,” Douek said. “They’re looking for a partner to come in and help accelerate it for the next 10 years because they think, ‘What got us here won’t get us there.”
So, finding your target is a matter of finding the right price and fit, but also the right kind of investment. While many potential tech targets are still growing, many manufacturing targets are looking to sell. “We’re already seeing it, and over the next few years we’ll see even more activity in those $30 million to $100 million businesses that have been run by a family for 20 or 30 years,” Douek said. “Those individuals are thinking about how they can cash out and retire.”
If your company is looking for a buyer, you might want to consider how best to clarify your value.
Clarify your value
If a company wants to position itself as a target for M&A, how can it prepare? Douek said this question warrants intentional consideration. “It’s definitely a discussion worth having. There’s a timeline associated with a transaction, often 12 to 18 months, where companies have the opportunity to take stock of how they’re operating and think about the things that might help strengthen their value proposition.”
At the same time, Douek said that companies need to be honest and transparent about what they do. “The thing to remember is that firms will always be looking for spikes or troughs in the financials over the recent years, or any significant changes to how the business has been operating or how it’s been performing, and they’ll ask questions about that.”
Bradford agreed, “Don’t do anything that’s confusing to the market. Focus on operational excellence and keep your quality high. I can’t tell you how many times I’ve seen processes get derailed because there’s a quality issue that surprises everyone in the home stretch. Also, stay close to your customers; you don’t want any surprise canceled orders, changes in the customer’s view of the product or things of that nature — those situations derail deals.”
Domestic manufacturers could see higher valuations if tariffs and other political actions put international supply chains at risk, but there are several market factors to consider.
Consider market factors
“There’s a lot of discussion about reshoring,” Douek said. “As any changes to free trade agreements get worked out, we’ll start to see how seriously companies with a global footprint need to think about where they’re manufacturing. It all comes back to that strategic planning imperative.”
“I don’t think we’re seeing wholesale extraction of manufacturing from China in the next year,” Bradford said. “What I’m seeing is companies are thinking about long-term rebalancing and where they’re thinking about making investments.”
Schindler said other options can come into play. “Reshoring or nearshoring is one option. I think companies are also considering whether they get into joint ventures with other companies that are in the geographies where they want to be internationally or whether they make acquisitions there so that there is an entity they can sell through without some of those challenges.”
However, many manufacturers are looking at factors beyond location. “When I see specialty manufacturing acquisitions in the U.S., they’re more focused on adding a technology, capability or customer base,” Libeg said. “It can also be intellectual property,” Schindler added.
Intellectual property and technology can be central to empowering your product or even helping to address potential supply chain concerns. While manufacturers often hesitate with large technology investments, M&A can provide opportunities to fast-track the future. Schindler noted, “Technology is often very expensive, and manufacturers tend to be slow at implementing it, but if there’s an acquisition target with the latest and greatest, that can make them more attractive because the implementation cost is not necessary.”
Contacts:
Tom Libeg
Principal, Transaction Advisory Services
Grant Thornton Advisors LLC
Tom is responsible for leading buy- and sell-side transaction services at corporate and private equity clients. He has extensive experience in all aspects of due diligence, transaction structuring, deal negotiation and post transaction planning and execution.
Cleveland, Ohio
Industries
- Manufacturing, Transportation & Distribution
- Private equity
- Services
- Retail & consumer brands
Service Experience
- Advisory
- Transaction advisory
- Commercial and growth
Tim Douek
Managing Director, Transaction Advisory Services
Grant Thornton Advisors LLC
Timothy Douek is a Managing Director within Grant Thornton’s Transaction Advisory practice. He provides a range of transaction diligence services with a specific focus on the design and deployment of profitable, sustainable strategies for organizations looking to optimize their operating models through organic and inorganic growth.
Philadelphia, Pennsylvania
Industries
- Banking
- Energy
- Life sciences
- Media & entertainment
- Transportation & distribution
- Manufacturing, Transportation & Distribution
- Healthcare
Service Experience
- Advisory
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