How M&A Transactions Are Impacting The Growth Of Manufacturing Companies - Hartman Executive Advisors

Nearly two years into the pandemic, the manufacturing industry is continuing to feel the debilitating effects of COVID-19. Countless businesses were forced to alter their supply chains to keep up with growing demands by advancing their production operations or changing production locations. According to the latest EY Global Capital Confidence Barometer, 78 percent of manufacturing executives do not expect their profits to recover to pre-pandemic levels until 2022 or later.

In an attempt to strengthen their balance sheets and jumpstart their growth engine, many companies are looking to Mergers, Acquisitions, Alliances and Divestitures (MAAD). Organic growth can take many years but acquisitions, mergers and other business combinations have become fundamental to gaining a competitive advantage. M&A can impact a company in numerous ways, including its stock price, capital structure and future growth prospects.

Higher vaccination rates, coupled with easing COVID-19 restrictions in many countries, have improved economic forecasts in the manufacturing sector. In turn, many organizations are reassessing their strategies and are looking to M&A to strengthen their portfolios. Learn more about how M&A transactions are impacting the growth of manufacturing organizations in today’s business market.

Why Manufacturing Companies Are Looking To M&A

When making the decision to combine a business through a merger or acquisition, leaders must consider not only if the strategy is right, but if it will create value. In the middle market, vertical and horizontal acquisitions are most common. Many growth-oriented manufacturing businesses are also realigning their portfolios to divest underperforming companies and assets.

These businesses aim to strengthen their balance sheets and invest in organizations that enable horizontal growth in new markets, channels, products, services and capabilities. Through vertical growth, businesses can gain more control of the end-to-end value chain. Acquisitions have also helped countless businesses in the manufacturing industry address the current labor gap.

Treating M&A as a business strategy rather than a transaction can give businesses an edge that differentiates them from competitors. Merging companies or acquiring another business can bring countless benefits to organizations, including improved economic scale, increased market share, lower labor costs, enhanced distribution capacities and access to more financial resources.

The Three Laws Of Successful Business Combinations

A successful business combination is one that uses resources in a way that results in a profitable outcome. Business combinations should also follow three basic rules that are necessary for an advantageous union that rewards each party involved in the transaction. The three laws of business combinations include:

• First Law – The business combination must have the potential to create more value together than any individual party would have alone. Consider how much value the parties could create in the market when unified and what resources must be combined to create this value.
• Second Law – The business combination must be properly designed and managed in a way that realizes the joint value. Consider what structures and partners fit the goal best and how the business can manage any risks or concerns that may materialize as a result of the combination.
• Third Law – The third and final law states that the value earned by all parties must motivate them to contribute to the business combination. Consider how the joint value will be divided and shared over time.

Ensuring A Successful M&A Transaction For Manufacturers

The manufacturing industry has experienced significant disruption across the globe. During the pandemic, there were far fewer transformational deals and a greater focus on small- and medium-sized deals. There was also an increase in Special Purpose Acquisition Company (SPAC) activities throughout 2020, which resulted in an influx of Private Equity (PE) investments in technology and digital portfolio companies.

With a steady increase of M&A activities in manufacturing, there are several things that businesses should consider following a merger, acquisition or divestiture. First, start planning early by bringing in the right teams to help prepare for the integration. Use a structured synergy model to identify possible risk areas and synergies and look for ways to streamline synergy realization.

During an M&A transaction, be open to digital opportunities. It is normal for focus to be on Transitional Service Agreement (TSA) needs during a transaction cutover, but be on the lookout for new digital and automation opportunities that could improve the effectiveness of the transaction. Businesses will also want to address possible workforce-related risks early on by evaluating whether target employees are at a high risk.

Speak With Our Manufacturing M&A Experts At Hartman

While the pandemic has left many companies uneasy about the future, M&A transactions are showing great promise in the growth and success of manufacturing organizations. Working with an experienced M&A advisory team can make all the difference. The experts at Hartman can help you with M&A planning, due diligence, staff and vendor selection, technology selection, contract negotiation, security review, and communications planning. Contact Hartman Executive Advisors today to get started.