What You Need to Know Now
The hour that I spent listening to an overview of the Manufacturing Industry M&A Market Monday morning was time well spent. More than anything it confirms what I already knew to be true…even looking at a very narrow sector of the market…times, they are improving…albeit slowly. Morgan Burns of Faegre & Benson, Michael Dillahunt of Piper Jaffrey, Mike Israel, Mill City Capital and Bob McGrath of H.B. Fuller & Company joined forces to discuss the current state of M&A in the manufacturing sector, each bringing a different expertise to the panel. If you didn’t have time to listen, but still want to know what was said, read on.
Deal flow as well as deal size are both way up from 2008 and 2009 levels and valuations are returning to more historic norms. Manufacturing was one of the last sectors to experience the dramatic declines during the peak of the recession and they are also now one of the sectors lagging as the recovery continues. Are more manufacturing deals getting done these days? Yes…both by financial buyers and strategic buyers. But are these deals being done without challenges? No. Buyers are being cautious and they don’t want to make mistakes. Among issues that are still posing challenges for both strategic and financial buyers alike are agreed upon valuations, deal structure and control. Legal issues like anti-trust violations and environmental laws also come into play…the stakes are higher and the risks are greater if a buyer is wrong. On an interesting note, in this post-recession period labor issues are becoming less and less of a concern as a component of the manufacturing sector. The general trend has been that as manufacturing has become more efficient, the labor pool needed to operate has shrunk and the resulting labor costs as a percentage of overall costs have been reduced to between 10-15%.
Both strategic and financials buyers are in the market for good quality companies that have come through this recession without major hits to their bottom line. Although many strategic buyers are cash rich, the competition from financial buyers coupled with the intense due diligence that deals demand has slowed down the transaction process. Financial buyers may be in a better position than strategics to get deals to the finish line. They have cash to spend, financing is again readily available and they have experienced teams to work through the due diligence process.
The US manufacturing sector is attracting attention from both domestic and international companies. With the weaker dollar and relative gains in unit labor costs, the US is seen as a less expensive place to do business these days. The weaker labor market suggests a protracted period of moderate wages and the wave of outsourcing has played itself out… in fact, there actually may be a reversal of that trend. If you own a manufacturing business and have been considering a partial sale or sale… now might be a great time to explore your options.
Comments or questions are welcome and I’ll be happy to respond accordingly.