Manufacturing 2021: Using M&A as a Growth Tactic, and Other Insights, Predictions and Advice for M&A Success

"With faster deal cycles, focus on divesting low-performing businesses, investments in digital and technology portfolio, manufacturers will turn to M&A as a vehicle for growth in 2021,” says Prasoon Saxena, SVP, Manufacturing. Apart from discussing COVID-19 impacts and predicting trends, he also shares practical tips and advice on reducing business and technology complexities to emerge successful post mergers, acquisitions, or divestitures in this in-depth interview.

Q: COVID-19 caused a lot of disruption for manufacturers worldwide. As we get onto the road of recovery, how will it impact M&A in the sector?
A: While all sectors have witnessed varying degrees of COVID-19-related disruptions, the Manufacturing Sector was severely hit. M&A, in particular, saw a decline of 63% in deal value and 36% in deal volume in Q2 of 2020 compared to Q1 2020. There were fewer transformational deals (new market, channels) and more focus on small-to-medium size deals. We also saw increased Special Purpose Acquisition Company (SPAC) activities in 2020, which caused an influx of Private Equity (PE) investment in digital and technology portfolio companies supporting Manufacturing. SPACs provide an IPO investment vehicle for PE companies to acquire companies quickly.

Since pandemic-related disruptions will continue well into 2021, we’re likely to see a focus on regional adjacencies to drive revenue and a rise in local partnerships and joint ventures of contract manufacturing facilities rather than large international deals. If growth is the focus, can digital be far behind? We will see companies turn to M&A to drive their digital strategies and acquire technology companies with specific capabilities.

Another notable trend brought on by the pandemic-related uncertainties is the need for speed. In the 2008 recession, speed-to-close (STC) fell from 130 to 60 days; we will see a similar trend in the near future. Companies will seek faster cycles and bring in diligence teams earlier on for a more comprehensive audit of any target for acquisition.

Q: As manufacturers focus on digital strategies, do you see a rise in divestitures or acquisitions, or mega deals in the next two years?
A: While the road to recovery has begun, the journey will be long and staggered, hampered by COVID-19 resurgences. An M&A rebound in Manufacturing will be gradual and driven mainly by greater access to capital, investment in innovation, and optimizing operations on the backdrop of a vaccine rollout.

Cash positions in some sectors like precision mid-market are strong (unlike most Manufacturing). They will definitely look to divest non-core or low-performing businesses, turn around, and reinvest the money into acquisitions and investments in digital technologies such as additive manufacturing, shop floor operations, etc.

Q: With increased M&A activities in Manufacturing, what advice would you give companies following a merger, acquisition or divestiture?

• Plan early and plan well: Bring in the right teams to prepare for the integration, identify risk areas and synergies early with a structured synergy model; the “quality of the diligence” is as important as getting it done quickly. Even as you plan for quality, consider ways to fast-track synergy realization.
• Consider digital opportunities during a transaction: While the focus during a transaction cutover is primarily focused around Transitional Service Agreement (TSA) needs, keep your eyes open for additional digital and automation opportunities to improve the transaction’s effectiveness. A McKinsey report shows that traditional legacy cost reduction synergies may provide ~2% lift. However, by adding digital and analytics-related technologies, organizations can compound this with an additional 4-5% savings.
• Identify workforce implications early: Consider workforce-related risks while planning for an acquisition by evaluating whether the target employees are in high-risk or containment areas. Companies should also focus on retaining internal talent, even if it comes at a cost. Relying on contractual talent, which can be expensive and time-consuming, may introduce integration risk, more significant rework, and missed deadlines.
• Fit the integration model to the needs of the business, not the other way around: Right-size your target state model to fit the needs of the business and examine your current state beliefs, assumptions, and existing contract commitments. CXOs should consider the value horizon and thence determine the right target-state operating model. For instance, if the intent is to acquire, optimize and sell quickly, then to invest in an asset-light, cloud-first model makes better sense.

Q: Along with overcoming business complexities, what should companies do to simplify technology complexities?

• Build a flexible data and transaction business architecture: Consider standardizing your integration model and architecture. While every transaction is different, you can mitigate complexity with due diligence and a pre-thought lean future-state operating model. A lean, migration-driven business architecture helps connect business and IT capabilities and aligns business-driven integration imperatives with IT plans. This is critical if you are seeking cost reduction and speed-to-integration. Also, start with the end in mind, examine your transaction principles and imperatives and then decide on operating and technology details.
• Leverage proven integration patterns — don’t reinvent the wheel: COVID-19 has introduced considerable spikes in demand and supply-side shocks; lean integration patterns for such business capabilities will help make decisions that are best aligned with these critical business imperatives. Additionally, capabilities that can automate integration and synchronize business data (within HR, finance, ERP, supply chain) will significantly speed up integration.
• Consider cloud-first: Cloud-enabled integration models help reduce the investment needed in setting up a Minimal Viable Future State model by providing some of the required plumbing. It also reduces the need to customize integration adapters for each transaction. Standardized IaaS, PaaS and SaaS options can improve resilience, integration speed, faster adoption and scalability. Security is also a huge concern now with companies looking at parallel and serial transactions. A cloud-first model will provide a baseline framework for security monitoring and risk remediation.
• Create a stand-alone mirror copy: A significant challenge post-M&A is exiting the TSA or incurring penalties if deadlines are not met. The new company could leverage interim steps like creating stand-alone mirror data and ecosystem copies to overcome this challenge. In this way, a longer-term integration or conversion can occur while exiting the TSA can be accelerated by turning off links back to source systems that will not be moved. This reduced scope versus trying to migrate full systems can help mitigate exit delays and soften the impact of less-than-ideally informed decisions.

Q: And lastly, do you anticipate a silver lining for Manufacturing?
A: The U.S. economy expanded at an unprecedented 33.1% annualized rate in Q3 of 2020, as the nation partially reopened. While industrial GDP at the end of 2020 is still lower than in 2019, manufacturing output advanced 0.8% for its seventh consecutive monthly gain. The M&A recovery that started in the second half of 2020 will accelerate in 2021. SPAC deals in the Manufacturing and Automobile sectors will continue to grow and private equity is well-positioned with over 1 Tr in dry powder to drive acquisitions.

Because COVID has created a virtual world, resulting in further fragmentation in the supply chain and operational capabilities, the move to digital will only accelerate. With only so much of the bottom line that savings and optimization can drive, Manufacturing companies will be looking for M&A as a vehicle for growth in 2021.

The recent attention to an adaptive supply chain — because of COVID-19 — is a good thing. The need for more raw materials and advanced production facilities can positively affect remote and underserved locations (and the labor force). It is certainly a silver lining since the new focus will allow firms the ability to shift plant and Manufacturing to other products quickly, enabling real-time views into track-and-trace and distribution. All this requires an underlying focus on adaptive technologies that can be quickly leveraged by both sides of a merger or acquisition.

According to a Citrin Cooperman survey of more than 200 U.S. Manufacturing and Distribution companies conducted in the summer of 2020, 68% indicated growth in online sales between 11% and 50% over the last 12 months. A key to maintaining this success will mean investments in cloud-enabled enterprise resource planning systems and cybersecurity tools to support demand for these channels across both the buy- and sell-side.

While Manufacturing is gearing up for some M&A action, discover what’s happening in other industries in these insightful blogs:

• M&A Forecast for Life Sciences with Adam Nelson, Senior VP, Life Sciences
• M&A Forecast for Financial Services & Insurance with Wayne Busch, President, Financial Services and Insurance
• M&A Forecast for Health Plans with Shashi Yadiki, President, Health Plans

Related blogs:

• Is COVID-19 Driving the New Normal in M&A?