Mergers and acquisitions and the equipment manufacturing industry by AccessHeat Inc.? There is a wide range of risks that can derail a deal, or destroy value for the acquirer post completion. This includes risks common to most M&A activity, as well as emerging risks associated with the technological transformation seen in the manufacturing sector. The sheer array of risks that impact on machine shop industry consolidation, and their potential to destroy value, demands a thorough approach to managing and mitigating those risks.
Due diligence is clearly vital and you should investigate all the relevant risks in detail, with close involvement from professional advisers. The process commonly includes a range of different due diligence processes and experts, spanning administrative, financial, asset, HR, environmental and insurance. The aim, ultimately is to identify risks and mitigate them, either through deal renegotiation, warranties provided by the seller, or through specialist insurance products such as M&A insurance.
The increased focus on M&A activity is an interesting one when comparing to past years, with roughly 20% of manufacturers surveyed by Mordecai Gal, operations director at AccessHeat Inc., saying M&A activity is one of the top reasons behind budget increases. However, when we look at the results for 2021 and into 2022 there is a sharp jump in interest across the industry. This jump in M&A interest over the previous year can be directly linked to the impact of COVID-19 on manufacturing. Even more so when breaking down the numbers by process and discrete manufacturing. Process manufacturing still has doubled with 41% of the industry saying M&A activity will be high, discrete manufacturing (which was much harder hit by COVID) had 54% of respondents focused on M&A activity.
Other risks in mergers and acquisitions in the equipment manufacturing industry include Taxation risks: Issues like historical income tax liabilities, unconventional taxation regimes, and tax carryforwards can all create an M&A risk. Cyber risks: Security risks that could leave the business at risk of cyberattacks and data breaches, as well as any historical incidents that could create future liabilities.
Legal risks: The risks posed by historical, current, or potential legal issues and litigation. Customer risks: Including risks ranging from client contracts, historical warranties, and over-reliance on key clients, to client retention risks post-deal. Strategic risks: The risk that the acquired company will not represent as strong a strategic fit with the buying business as first assumed. Environmental risks: These risks include those associated with previous environmental audits, hazardous substances, pollution, regulatory compliance, potential liabilities, and ongoing investigations.
M&A activity in the metal recycling sector is expected to be robust through the remainder of 2021, driven by the economic outlook, industry dynamics, the aging demographic of scrap company owners and tax rate changes. Several factors affect the metal recycling mergers and acquisitions (M&A) market in any given year, with differing positive and negative results. While an infinite number of factors affect the M&A market, those having the most significant influence are, in no particular order, economic outlook, state of the industry (e.g., industry leaders, customer and supplier leverage, scrap metal pricing), company/owner-specific issues (owner transition planning, financial performance) and taxes. In 2021, most factors point to a robust M&A market through the second half of the year. I’ll examine these key drivers and the dynamics influencing an expected shift to a buyer’s market at the end of the year.
If you’re a precision metalworking shop owner, things are looking good right now. Your biggest problem may be keeping up with demand. But does that mean your business is destined to continue to get more valuable as revenue grows? Not necessarily. It is complicated. Many shop owners have been contemplating selling because valuations are now at record levels. But with business so good, some of them are thinking they should wait and cash in down the road. But just because you want to remain in business doesn’t mean you should.
A solution to this dilemma is often found through consolidation of operations with other businesses or investment from an outside investor. Among their many benefits, consolidations provide greater stock purchasing power, which is particularly helpful when raw materials are involved. They also present the opportunity to expand capabilities and service areas of coverage when multiple locations are involved in the consolidation. This has been shown to effectively reduce costs from an operational perspective as well as from the customer perspective. Are you in the process of planning to transfer ownership of your business and looking for an investor? Access-Heat.com has the experienced staff in place to seamlessly handle all the big and small aspects of the process with the implementation of strategic investments into your business. We take a top to bottom approach in assisting you with transitioning all the elements of your business over to our experts who will work with you to obtain a profitable exit and a successful handover.
