M&A in the manufacturing sector
September 2020 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
September 2020 Issue
FW discusses M&A in the manufacturing sector with Kristin Ringland at EY.
FW: How would you characterise recent M&A activity levels in the manufacturing sector? What factors are driving deals in this space?
Ringland: In M&A, manufacturing was one of the dominant sectors of 2019, contributing to more than 13 percent of the total disclosed deal value across all sectors. In pursuing takeovers and mergers, manufacturing companies most prominently cited portfolio expansion – through products and services – geographic expansion and consolidation as rationales. They were also focused on gaining access to new technology and R&D capabilities, searching for growth through expanding market shares and entering new markets. However, with the coronavirus (COVID-19) pandemic reducing revenue, transactions are down slightly so far in 2020, as manufacturers shift their focus toward retaining liquidity. Nevertheless, in the first half of the year, deals already announced or in motion have been completed, and certain divestments have been accelerated to help companies boost liquidity.
FW: How are valuations, multiples and other dynamics influencing the size and complexity of manufacturing sector M&A?
Ringland: While average deal value increased, enterprise value and earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple declined by more than 30 percent year-on-year in 2019. However, average deal size fell in 2020 because of increased macroeconomic uncertainty. Since the majority of deals were oriented toward filling in the gaps in the portfolio or divesting non-core assets, deal sizes tended to be smaller than if the focus was to build market share and develop large-scale efficiencies. Despite lower valuations, companies looking to divest assets may agree to sell the business even at reduced prices, as economic challenges make it more urgent to preserve liquidity and maintain management focus on core business. Lower valuations are expected to continue in 2020, due to sluggish deal demand, coinciding with the continued pandemic-driven downturn, driving companies to divest businesses that are dragging them down.
FW: Could you highlight any recent, high-profile M&A deals in this sector which exemplify the vibrancy of the market? What do these deals tell us about the underlying motivations of buyers and sellers?
Ringland: In the current climate, with focus largely off large, transformative M&A, much of the key activity surrounds the ongoing trend for portfolio management – acquiring to fill gaps or divesting to exit non-core businesses. For example, in May 2020, Huntsman Corporation, primarily a commodity chemicals player, completed its acquisition of CVC Thermoset Specialties. The deal was aligned with Huntsman’s strategy of growing its specialty advanced materials portfolio by adding specialty chemicals, such as tougheners, additives and catalysts, from CVC’s portfolio. Also, in February 2020, Surf Air Inc., a shared private aviation company, acquired online aviation marketplace BlackBird Air Inc. in order to simplify consumer experience and to reach out to more customers via the internet.
“In the wake of the COVID-19 pandemic, agility and business resilience are two key qualities to look for in a new company to acquire.”
FW: How significant is the influence of activist investors in terms of spurring deals? Does the stakeholder landscape appear more difficult to navigate?
Ringland: In the past couple of years, investor activism peaked in the manufacturing sector. While it declined slightly in 2019, manufacturing companies need to be on their toes when it comes to delivering value to shareholders. Activist investors continue to drive companies away from complex, multi-segment portfolios to more focused and specialised players, which often leads large corporations to split up. Further, with the economic slowdown in 2019, followed by the COVID-19 pandemic, manufacturing players may face activist investors pushing to further prune portfolios or streamline leadership structures to safeguard agility and returns.
FW: How important is it to perform robust due diligence and effectively manage transactional risks?
Ringland: In the wake of the COVID-19 pandemic, agility and business resilience are two key qualities to look for in a new company to acquire. And to achieve synergies in a merger, talent and culture must be integrated. Hence, due diligence should not only focus on the potential for synergies, but also post-merger integration, long-term value creation and the potential for evolution in tomorrow’s market and beyond.
FW: What essential advice would you offer to manufacturing companies on approaching a deal to capture its full value-creation potential? Fundamentally, what elements are key to M&A success in this sector?
Ringland: Manufacturing players need to focus on a well-structured strategy for integration that focuses on the planning and implementation of the acquisition or merger, but also follows up to make sure the intended synergy or benefits are achieved. Further, when acquiring a new company, manufacturing players may need to look at not only the current value, but also the long-term value that the target company creates for its stakeholders. Several companies are acquiring technology players to broaden service offerings to their customers. They must also verify that acquired assets are in sync with today’s strategy, yet agile enough to serve the customer of tomorrow more sustainably. Another key point to consider is the planning and management of people and culture. Several intuitively profitable deals have failed to generate the expected synergies because the cultures of the two firms were not seamlessly unified. With talent as an increasingly dynamic and scarce resource, companies need to validate that the talent and culture strategy is well communicated and understood across functions and regions.
FW: How do you expect M&A in the manufacturing sector to unfold in the months ahead? Are any trends and developments likely to impact transaction levels?
Ringland: As companies recover from the impact of the pandemic, they will look to build resilience and agility, particularly in their supply chain. This may lead to reintegrating supply chain elements and modifying production footprints to develop a more robust supply chain, thus spurring transactions in the manufacturing industry. This need for resilience is also expected to drive transformation for manufacturing companies, triggering the need for new capabilities. While some of it may be internal, others may require acquisition of capabilities – serving customers more effectively for example, thus driving another layer of transactions to the mix. Meanwhile, companies should continue to consistently review their portfolio by acquiring companies and technologies that fill gaps in their portfolio and divesting assets that are no longer relevant to their core business. As companies grapple with more pressing issues and reductions in planned capital expenditures, deal volumes are expected to decline in the second half of 2020. Nevertheless, deal traffic is expected to increase by 2021 as the impact of the pandemic begins to wear off and demand normalises. The industry may even witness the return of megadeals, but that depends on the pace of economic recovery post-COVID-19.
Kris Ringland serves as a thought leader and adviser in transformational transactions within the advanced manufacturing and mobility industries. She has nearly two decades of experience in strategy development and transactions advice for private equity funds and public and private companies. She can be contacted on +46 (8) 5205 9278 or by email: kristin.ringland@parthenon.ey.com.
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