According to the U.S. Census Bureau, the U.S. manufacturing sector encompasses an estimated 255,000 public and private companies. Wichita and the surrounding area boast an impressive list of privately-owned manufacturing companies. It is estimated that there are more than 360 private manufacturing companies and machine shops in the Wichita market. These companies support the general manufacturing sector and multiple industries including aviation, construction, agriculture and oil & gas.
It is estimated that manufacturing of goods makes up about 30% of the U.S. GDP, compared to services, down from an even split 50 years ago. Coincidentally, fewer than one in ten Americans work in manufacturing today compared to one in four in the 1960s. Although manufacturing is not a huge share of the U.S. economy, it is vital to the overall economic health of the country as so many other industries, including countless service industries, are dependent upon it.
As a result, manufacturing trends are closely monitored and followed as they can often help explain why something happened or foreshadow what is to come. The volume of merger and acquisition (M&A) activity is one of the indicators available to help identify trends within the manufacturing industry.
What trends are driving M&A activity?
The tight labor market, company focus on scalability of operations and the overall national volume of capital expenditures are all factors driving manufacturing M&A activity.
- With overall unemployment at historically low levels, the availability of skilled labor has become an issue for most manufacturing companies. Businesses looking to expand are increasingly focused on acquiring talent in order to manage growth.
- Acquiring technology and equipment that will improve existing processes is also a part of the trend. Companies with advanced processes and state-of-the-art manufacturing technology are highly sought after as a strategic way to grow the business and overcome the shortage in skilled labor.
- There is also an increased focus within the manufacturing sector on the scalability of operations. The market is more competitive than ever before and many companies are choosing to diversify their product offerings by identifying complimentary products; thereby leveraging existing expenses and providing access to new distribution channels and customer bases.
- For every buyer, there is a seller. In many cases, sellers are comprised of family businesses that are implementing an exit strategy, but another factor contributing to the sell-side of the equation is the number of businesses that have renewed focus on their core competencies.
- Lastly, to the extent the U.S. and other countries around the world are embracing a renewed interest in infrastructure spending, U.S. manufacturers expect to experience increased revenues. There is a growing expectation that the country is poised to experience a significant increase in infrastructure investment for highways, bridges and tunnels due to years of neglect. Manufacturers of construction equipment, tools and safety systems, just to name a few, are positioned to benefit from the increased investment. Private equity firms are actively raising capital in anticipation of this investment. The timing and extent of a federal government infrastructure spending bill will identify those specific manufacturing sectors who are positioned to benefit the most.
How are valuations and deal flow metrics being affected?
According to Business Valuation Resources, reported deal volume across all industries in 2019 increased 5.0% over 2018. On the other hand, after reaching their five-year peak in the third quarter of 2018, EBITDA multiples have fallen with the largest decrease in the multiples paid by public company buyers for privately held companies. EBITDA multiples for transactions involving private company buyers and sellers have fallen as well, but only slightly since 2017.
In general, across all manufacturing sectors, multiples of Net Sales, Seller’s Discretionary Earnings and EBITDA have all been in decline. What is the driving force behind this? After reaching a peak in 2017, company revenues began to move downward and, as a result, selling prices followed suit. Current sell price to revenue multiples are at their lowest point since 2010.
Like the stock market, the volume and pricing of M&A deals can largely be influenced by uncertainty. Uncertainty can range from geopolitical concerns including the 2020 U.S. presidential election and global trade/tariff concerns and their potential interruption of supply chains to the sustainability and longevity of the TCJA tax reform legislation, interest rates and inflation.
Although companies will continue to look for opportunities, they may account for some of the uncertainty through reduced offering prices. In 2017, sales prices reached a high of 88% of the asking price. Through the first half of 2019, this percent had declined to 80.3% reflecting a decided shift in momentum in the buyers’ favor. Irrespective of sales price, the days to sell or complete a transaction have remained relatively steady since 2017 at 221 days.
Largely due to U.S. geopolitical concerns, many pundits are questioning the sustainability of the U.S. economic expansion, which is now in its 11th year. As these concerns moderate, the next nine months will show whether the declining prices and valuations discussed above are truly a trend.
Please note the specific manufacturing sector within which a company operates, its sales volume, gross and net profit margin, as well as several additional dynamics such as customer concentration have a significant impact on individual company value.