Electronic manufacturing industry consolidation guide from Mordecai Gal? 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 electronic manufacturing industry consolidation, and their potential to destroy value, demands a thorough approach to managing and mitigating those risks.

Clearly, manufacturing M&A risk is a complex area, so the below gives just a flavour of the various risk areas. Independent advice is crucial to identifying the full range of risks associated with specific deals. However, broadly speaking some of the key risk areas to consider include financial risks, the risk that the target company’s trading position is not as strong as believed, that could be due to reporting errors, unreasonable assumptions linked to financial projections, debt, working capital, and a whole array of other issues.

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.

The precision machining business today has all the classic drivers of a consolidating industry. Driven by money, technology and the supply chain itself, the industry is in play. If it follows the classic pattern, the strong will get stronger and the weak will get weaker. In a highly fragmented industry entering into major consolidation, the bottom third of participants are typically most at risk and many won’t survive. Partnering may be a necessity, not a choice.

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.

While we expect to see manufacturing spend increase in 2022 across the board, thinking back to manufacturing’s recovery progress, there are companies better positioned to take advantage now. It will be those digitally enabled companies that will lead the charge in making targeted investments, using M&A to further their transformation efforts. While those non-digital manufacturers that are still struggling will continue to fall further behind.

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.

The machine shop and electronic manufacturing industry are complex and multi-faceted. With many machine shop owners preparing for retirement, they often find that there is no succession plan in place due to children who prefer to seek independent careers. Because of this, business succession planning becomes a problem many owners face. Operating a machine shop of any kind involves a high level of skill and experience coupled with the need to regularly make large purchases of stock and equipment. Are you in the process of planning to transfer ownership of your business and looking for an investor? AccessHeat Inc. 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.