The onset of the coronavirus marked the beginning of a new era for businesses and industries around the world, dividing individuals from their jobs and businesses from their continued growth, with manufacturing being no different. Despite manufacturing’s close connection to the general health of the economy and being responsible for employing more than 11 million people across roughly 255,000 public and private companies, M&A activity in the manufacturing space has been static to say the least.
Although the manufacturing market did experience a significant drop-off in terms of M&A activity in the first two quarters of 2020, there was a noticeable resurgence in M&A activity in the following two quarters, which can be attributed to the accessibility of capital via private equity and special purpose acquisition companies (SPAC). But could there be additional factors that could serve as a driver in the resurgence of M&A activity?
As the manufacturing industry continues to recover in 2021, the following catalysts will aid in the revitalization of manufacturing M&A activity:
Changing Political Landscape
In conjunction with the new Biden administration may come furthered governmental regulations, increased income tax rates, and a modified stance on trade. However, these changes are all dependent on Congress, which is now controlled by the Democratic Party. Nevertheless, today’s age is tarnished by uncertainty, and a combination of governmental changes and COVID-19 could create additional, adverse volatility in the manufacturing market.
Opportunities in Innovation for the Manufacturing Industry
Before the pandemic, manufacturing companies were seeking ways to improve their supply chains and lower costs, but the coronavirus quickly fast-tracked the need to optimize. As companies continue their recovery efforts, investments in additive manufacturing, digital factories, digital supply chain solutions, and sustainability technologies will rise. Companies have no choice but to operate smarter given the nature of the current, unprecedented times which may likely result in an increase in machine-based manufacturing.
Future of Capital
As mentioned above, SPACs were responsible for aiding M&A deals in the second half of 2020 and according to Industry Week, SPAC will continue to generate money through initial public offerings (IPOs) namely in the power storage, 3D printing, and EV-charging infrastructure sectors.
Shifting Manufacturing Industry Paths
When shutdowns were enforced throughout the world, many industries felt the immediate impact of changing spending habits, while companies in the home goods and sporting equipment experienced a surge. But as always, it will be critical for manufacturing end markets in 2021 to devise a plan that will improve and advance their present status in the field.
While it is difficult to prepare for a future when navigating uncharted territories, below are important options for businesses to consider when looking to secure the upper hand in M&A:
Transform Your Business to Safeguard the Future
- Merge interrelating acquisitions to increase scale, create value via more comprehensive solutions, or aid vertical integration.
- Take advantage of disruptive opportunities to enter new markets or business areas to secure the company’s future positioning.
- Amass underperforming, early-stage companies.
- Acquire internal competencies to expedite digital transformation.
Change the Game
- Establish a network of new partnerships and alliances – Having an external team of professionals to collaborate with means advancing your business’s current status. Your network is your net worth and connections are heavily relied on in the M&A playing field.
- Acquire capabilities to fill in significant market or internal operating gaps – Whether this means hiring new talent or outsourcing responsibilities, identifying your business’s shortcomings do more than provide a temporary fix.
- Acquire high-growth businesses from the interconnected network of companies related to your business to develop innovative products – Why invent the wheel when one already exists? Businesses can accomplish great things when building upon one another.
- Invest in companies on the “edge” of the core business – Add value to your core business by discovering ancillary business opportunities with completely different, yet complementary, products or services. But only by executing well in your core business can profits in your edge offerings be realized.
Given the current economic, social, and political uncertainty of the world, dealmaking has been anything but normal. And while M&A is not at a complete standstill, it has not fully recovered from the COVID-19 pandemic. As a buyer, seller, or investor, it is paramount to stay one ear to the ground and anticipate the trends in M&A before they transpire. Below is a list of action items to address today with your advisors and CPAs:
- Revise your business’s operational budget to support future plans. Whether you are taking a more offensive or defensive path in response to a post-COVID-19 economy, your businesses will need to position itself strategically in the new dealmaking environment.
- Extend line of credits with your financial institutions or discuss with advisors about alternative approaches and alliances for the investment in your company’s growth.
- Prepare a capital budget to leverage opportunities in the latest technologies that can change the game for your M&A priorities.
- Round 2 of the Paycheck Protection Program (PPP) opened in January as part of an overall COVID economic stimulus package. Further, tax benefits are available to PPP borrowers, including the Employee Retention Credit (ERC) and the Families First Coronavirus Response Act (FFCRA). Loan eligibility and the compliance process can be complex but seeking the guidance of financial advisors can expedite funding, ensure proper tax planning, and take advantage of this opportunity.
- Compute your business’s EBITDA (Earnings Before Interests, Taxes, Depreciation, and Amortization) and determine your value gaps with your CPAs and advisors.
- Manufacturers may qualify for Federal and state R&D tax credits if they design new products or new processes. The tax savings from potential Federal and state R&D tax credits can be reinvested into your business to support current operations or finance business growth. Find out more about R&D tax credits and if you might qualify.
While the market is volatile, be secure and agile – Contact our team of M&A experts to be prepared for any change that is to come in the M&A manufacturing industry.
About Tessa Lucero-Bennett
Senior Manager, CPA & MBA
Tessa is a Senior Manager at Ryan and Wetmore. Tessa has over 20 years of experience serving and advising businesses in all phases of the organizational life cycle. Her experiences range from traditional accounting and tax services to complex consulting services, including business planning, financial budgets and projections, benchmarking and financial trends, M&A support and analytics, internal controls assessment, development of best business practices, and financial training for top management levels.
Read Tessa’s full bio.