Advanced manufacturing companies are using mergers and acquisitions to add technology to their products, find the right talent in tightening labor markets and enter new markets. These driving factors should continue to carry merger and acquisition activity in 2019, despite headwinds from geopolitical uncertainty, including the current trade battle between the US and China and rising interest rates.
Over the past several years, companies in aerospace and defense, chemicals and industrial manufacturing have been both divesting to focus on their core business — sometimes at the behest of activist investors — and buying core strategic assets divested by others. They have also been making acquisitions outside of the sector to add technological innovation as they try to meet customer demand for a more services-led approach.
Geopolitical forces are also impacting manufacturing M&A. In our most recent CCB report, 48% of manufacturing executives surveyed listed regulation and political uncertainty as the biggest risks to dealmaking. This uncertainty includes tariffs on key inputs like steel.
Companies in the sector are showing signs of committing more to using mergers and acquisitions as a means of transformation, says David Gale, EY Global Advanced Manufacturing Leader, Transaction Advisory Services.
In this way, these companies have been rewriting the script to enable sustainable growth in an uncertain, technology-driven future. We would expect these trends to continue and funnel down from the largest to small and medium-sized companies.
“In the next six months we might see some larger breakups,” said Gale. “This will create opportunities for others in the market to acquire what the larger companies divest.”
At the same time, talent is becoming more of a focus. With a tighter labor market, manufacturers will rely on acqui-hires to bring in a skilled workforce, and companies with higher functioning workforces could become attractive targets for the workers themselves.