Mergers and Acquisitions in Manufacturing: Insights and 2021 Outlook

The impact of the COVID-19 pandemic led to an extremely volatile 2020, particularly in the manufacturing space. Many companies implemented drastic changes to their supply chain to keep up with demand by shifting production location in some cases, enhancing their production operations, or in-sourcing certain capabilities. Largely as a result of the shifting marketplace, deal flows ended the year on a significant upswing. A recent poll conducted by a national firm noted approximately 53% of US company executives plan to increase their merger and acquisition investment in 2021. However, there is uncertainty with the Biden administration policy direction and a potential for a shift in tax policy that could have significant impact on deal activity.

Steve Brady, CPA, Partner and Market Leader of Withum’s Transaction Advisory Services offers his advice on what to know if you are considering a deal.

Within the Supply Chain (Manufacturing, Distribution and Transportation/Logistics) industry, are there particular sectors that have seen an increase in deal activity?

While some sectors within the industry have undoubtedly struggled, such as suppliers to retail and restaurants, many others have benefitted to drive deals. Some significant factors that have allowed for this growth include investing in companies that have thrived from the pandemic such as e-commerce, cleaning supply manufacturers and distributors, direct delivery systems (UPS, FedEx, Amazon), as well as those who have implemented technology like automation systems and cybersecurity to strengthen the company’s position in the supply chain. Manufacturers and distributors who have sold into these enhancements, along with those in the aerospace and defense, sustainably-sourced food and beverage, and specialty pharma companies, have appeared more favorable to deal-makers and will continue to be in the post-pandemic world.

Considering the volatility in the market in 2020 and moving into 2021, where do you see companies focusing on investment to remain competitive?

In order to remain competitive in this market, manufacturers and distributors need to tactically shift their business operations to thrive in the post-pandemic world. They need to think strategically for the future of their business and swing their focus from their traditional channels. Do they buy or build to achieve these objectives? These scenarios oftentimes consist of making strategic investments such as in an e-commerce platform to roll into their business or enhancing their technology to be more efficient and profitable. When the time comes to sell the business, they’ll want their supply chain to look appealing to buyers from a customer and production standpoint.

It’s important to forecast what profit and loss look like in 2021 and 2022. I’ve seen that direct consumer focus has grown exponentially in many sectors during the pandemic, but it will be a challenge to repeat those sales in the upcoming months. There’s also been a shift digging deeply into the cost-side of manufacturers and understanding the sustainable cost structure is critical to success. It is a mistake to be overly aggressive with COVID adjustments to EBITDA that aren’t realistic and defendable.

Private equity’s share of deal volume in the US has continued to rise through 2020, and considering the significant capital available closing out 2020, what opportunities do you see arising in 2021? What factors will be key for enhancing value for PE firms?

Private Equity firms are readily willing to deploy capital and pay aggressive prices for quality deals. It is anticipated that the first half of 2021 will most likely result with robust deal activity. The factors that drive value depend on the product and the sector the company belongs to. For example, products that are highly engineered and add value to the consumer typically will thrive in a winning sector. Alternatively, some buyers also look for distressed deals, if they can get them a good price.

The pandemic created many opportunities for firms to work with portfolio companies so they can improve their operations. Making the strategic, supply chain and operational improvements during this time is essential to short-term and long-term success.

Companies are moving rapidly through due diligence as deal activity has continued to ramp up shifting into this year. Acquirers and business owners alike are keenly focused on initiatives to stay ahead of trends that can make or break deals. Are there “bargains” that you’re seeing out there with the economic downturn or are value-drivers focusing on the post-COVID world? Can you share some high-level examples of what you are seeing?

In a post-Covid world, some “bargains” investors look into are distressed or underperforming companies. These companies most likely were broken prior to the pandemic, and then the disruption ultimately pushed them over the edge. For example, companies selling into restaurants will most likely be bargains if the sellers want to sell. Financial sponsors are looking for those who have taken all they can from the pandemic and want to get out as long as the business is fundamentally sound and at the right price from a cash flow perspective. Thankfully for the economy, currently there aren’t many bargains out there, but there is an abundance of capital. If your business is doing fairly well you most likely have the opportunity for a strong deal.

Check out
Part 1 and
Part 2 of the HLB International Webinar on best practices, pitfalls to avoid, and the latest initiatives in 2021 to assist businesses towards successful Mergers and Acquisitions in the Manufacturing, Distribution & Supply Chain industry.

Manufacturing, Distribution & Logistics Services

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