Manufacturing output is down, the economic outlook is poor, margins are being squeezed, and uncertainty weighs heavily on the sector. So why are M&A transaction volumes growing in the UK manufacturing sector?
Challenges in manufacturing and the M&A market
News headlines have been shouting: “manufacturing is struggling” and “the M&A market is in decline”. And of course the headlines contain some truth, but a closer look reveals they are far from the whole story.
First, the bad news. BDO’s latest Manufacturing Outlook report, produced alongside MAKE UK, reveals weakening performance in Q3, with significant declines in output, investment appetite and employment intentions. The Bank of England has warned that there is a one-in-three chance of entering recession by the start of 2020.
Secondly, in the absence of multi-billion pound deals the M&A market deal values are down 40% so far this year. The top end of the M&A market appears more vulnerable to market volatility, global trade tensions, political instability and nervous debt markets. Uncertainty around the UK’s political direction has stalled some people’s strategic decision-making.
Setting the record straight: M&A in manufacturing is alive, well & kicking
Deal volumes in the manufacturing sector are actually rising. Surprised?
The challenging geopolitical market dynamics are weighing most heavily on businesses at the top end of the M&A market. However, the midmarket continues to see high levels of deals, they just don’t make the national headlines. As is so often the case, the entrepreneurial mid-sized businesses that are the economic engine of the UK are ‘getting on with it and finding a way through’.
This quarter’s PCPI shows the M&A market has demonstrated remarkable resilience in deal activity through 2019. An analysis of transactions in the manufacturing sector demonstrates a similarly impressive performance: 205 deals involving a UK manufacturing target or buyer completed in Q3 2019 alone, compared with 162 completed in Q2 and 171 in Q1. Proportions of deals attracting private equity investment rose to 19% in Q3, while the proportion of cross-border deals rose to 41%.
Why are manufacturing deal volumes rising?
Firstly, private equity firms have huge quantities of dry powder they need to invest. Secondly, UK assets represent good value for money for international buyers. Finally, businesses still need to maintain a competitive edge and accelerate growth; M&A is a quick and agile means of bringing expertise in-house to access new capabilities, technologies and markets.
Digitalisation is driving growth in manufacturing
A look at the manufacturing statistics in more detail reveals a different performance by subsector. Output and investment outlook is poor in subsectors such as basic metals and metal products which have been impacted by trade wars. Others areas, such as electronics and aerospace, have a resilient order book and are riding the wave of automation and digitalisation.
The opportunities in digitalisation are immense for manufacturing businesses. BDO’s 2019 Digital Transformation report highlights how digitalisation is providing opportunity across all parts of a manufacturing business, from 3D printing, automation, robotics and connectivity in the manufacturing process, to digitalisation of the wrap-around business processes that bring technology to market.
M&A is helping businesses achieve their digital strategy
Digital technology is no longer a nice-to-have but an essential part of business. Organisations that need to make a step change in their digital strategy increasingly look to M&A to achieve this.
A recent Mergermarket report into the Advanced Manufacturing & Technology sector, found that just under half of respondents to the survey expect growth to come through M&A, and that automation is the key technology they are prioritising for investment in the next three years. The second priority is big data, including machine learning and AI, to gain actionable insight across every area of the business.
We, at BDO, have seen an increasing number of successful manufacturing businesses implementing digitalisation strategies to improve internal processes and productivity as well as using M&A to access the growing automation market.
The sale of Lambert Automation, a leading manufacturer of bespoke automated production line equipment, to MPAC plc the sale of process automation businesses Briggs of Burton to CIMC Enric and the sale of PLF to JBT Inc are all examples of automation driving M&A activity.
We can be sure that digitalisation is here to stay, and adoption will continue to accelerate. Industrial automation and electronics deals have accounted for 16% of deals so far in 2019, a proportion which we expect to see rise. Underpinning this, we expect the electronics and automation sectors to perform strongly, taking a lead on growth opportunities in UK manufacturing.
Will deal volumes in UK manufacturing continue to be resilient?
Can we expect to see a softening in deal volumes across UK manufacturing as a whole? Well, we haven’t seen any sign of this yet. BDO has advised on over 1,800 manufacturing deals in the last 10 years. We don’t expect deal making to stop anytime soon.
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