About the series. September 2024, a panel of five manufacturing experts at Chortek shared strategies and tactics for exploring top-line growth while protecting the bottom line. The following is one of five articles produced as a result of that forum.
M&A Trends in the Manufacturing Industry: Seizing Opportunities in a Changing Market
In the dynamic world of manufacturing, mergers and acquisitions (M&A) have become a strategic pathway for growth, allowing companies to expand their market reach, gain new capabilities, and stay competitive. However, the current economic climate and changing market dynamics have introduced new trends and challenges for manufacturers considering M&A as a growth strategy.
Tom Kintis, President of CGK M&A Advisors, a leading M&A advisory firm, has a unique perspective on these trends, especially as they relate to the manufacturing sector. “The manufacturing industry is undergoing a transformation, and M&A activity remains one of the primary tools for businesses to grow, diversify, and compete in the marketplace,” he explains.
A Changing M&A Landscape: Impact of Rising Interest Rates
In recent months, the M&A market has experienced a slowdown, primarily due to rising interest rates. According to industry reports, deals are down by approximately 28% as the Federal Reserve continues to raise rates in an effort to control inflation and reduce market risk.
Despite this slowdown, the long-term outlook for M&A in manufacturing remains strong. “While interest rates have made things more challenging, it’s important to remember that this is just a temporary shift in the market,” Tom says. “We’re expecting a 35% increase in deal activity next year as companies and private equity firms adapt to the new financial environment.”
Rising interest rates are affecting deal multiples—the financial metric that determines the price of a company based on earnings before interest, taxes, depreciation, and amortization (EBITDA). For example, companies that were previously valued at 6x EBITDA are now seeing downward pressure, with multiples averaging closer to 5.5x. However, as the market stabilizes, these valuations will likely adjust upward.
The Role of Private Equity: Fueling the M&A Engine
Private equity (PE) firms play a central role in the manufacturing M&A landscape. With trillions of dollars in available capital—referred to as dry powder—PE firms are on the lookout for strategic opportunities, particularly in fragmented industries where roll-ups can drive growth. “There’s a huge amount of money out there looking for deals,” Tom notes. “When there’s so much capital in the market, it creates upward pressure on prices and valuations, but it also opens up opportunities for well-positioned manufacturers.”
Roll-ups, a common private equity strategy, involve acquiring multiple smaller companies to create a larger, more profitable entity. This approach is particularly effective in fragmented industries, where consolidation can lead to greater operational efficiency and market power. Tom cites several examples of successful roll-ups in industries like safety equipment and car wash systems, where PE firms have added multiple smaller companies to build larger platforms.
For manufacturers, this trend presents both challenges and opportunities. While larger companies may be able to secure lucrative exit deals through a roll-up strategy, smaller manufacturers may find themselves as targets for acquisition. Understanding the broader M&A landscape can help business owners position themselves to either capitalize on selling or identify potential acquisition opportunities to expand their reach.
Strategic Buyers vs. Financial Buyers
Another key consideration for manufacturers entering the M&A space is the distinction between strategic buyers and financial buyers. Strategic buyers are typically competitors or companies in related industries looking to expand capabilities, market share, or geographic reach. Financial buyers, such as private equity firms, are typically focused on improving operations and increasing profitability before selling the business at a higher value.
Tom emphasizes that both types of buyers are active in the manufacturing sector. “Strategic buyers are always looking for opportunities to grow, whether it’s through acquiring a competitor or expanding into new markets,” he says. “Financial buyers, on the other hand, are more interested in optimizing a business’s operations to unlock hidden value.”
Manufacturers considering selling their business should consider which type of buyer is the best fit for their objectives. Whether looking to retire, scale, or expand, the right buyer can help business owners achieve their goals.
Preparing for M&A: The Importance of Due Diligence
Regardless of the type of buyer, thorough due diligence is essential for any successful M&A transaction. Business owners must be prepared for an in-depth review of their financials, operations, and IT systems, which can take several months to complete. Ensuring that key aspects of the business are in order before entering the market is crucial to a smooth transaction.
Proper preparation can also increase the value of a business in the eyes of potential buyers. By addressing operational inefficiencies, updating financial records, and ensuring that intellectual property and technology are properly documented, manufacturers can position themselves for a higher valuation and a smoother sale process.
Opportunities for Growth in a Fragmented Market
Despite the challenges posed by rising interest rates and shifting market dynamics, the manufacturing industry remains ripe with opportunities for growth through M&A. Private equity firms continue to seek out fragmented industries for consolidation, and strategic buyers are still looking for ways to expand their market footprint.
“The key is to understand where the opportunities are and how to position your business accordingly,” Tom advises. “Whether you’re looking to sell or grow through acquisition, M&A remains a powerful tool for driving long-term success in manufacturing.”
Conclusion
As manufacturers look to the future, M&A will continue to be a key strategy for growth and ensuring a competitive advantage. While current market conditions may present some challenges, the long-term outlook for the manufacturing sector remains strong. With careful planning and a proactive approach, manufacturers can seize the opportunities that M&A presents to expand, innovate, and thrive in a rapidly changing market.
Author Bio: Tom Kintis is the President of CGK M&A Advisors, where he specializes in providing merger and acquisition services to privately held, middle-market companies. With over 20 years of experience in the M&A field, Tom focuses on sell-side and buy-side transactions, as well as private equity recapitalizations. His deep expertise in the manufacturing sector and strong relationships with private equity firms have helped many companies successfully navigate complex M&A deals to achieve their growth objectives.
Suggested Reading:
Read the entire Manufacturing Forum: The Future of Profitability series.
From Data to Dollars: Unlocking Profitability with Manufacturing Analytics
Maximize Margins: ERP Best Practices for Profitable Manufacturing
Tax-Proof Your Profits: Strategic Tax Planning for Manufacturers
