M&A plans in advanced manufacturing reach highest level in seven years

Advanced manufacturing M&A expectations increase as 90% of executives see the economic strength of the sector as improving.

Advanced manufacturing executives have become much more confident in the growth of the global economy and improvement in corporate earnings and credit availability in the past 12 months, and that confidence is also seen in their dealmaking plans. In total, 59% of sector executives in the EY Global Capital Confidence Barometer Advanced Manufacturing highlights said they expect to pursue mergers and acquisitions (M&A) in the next 12 months, up from 50% 12 months ago and the highest level in seven years.

The vast majority of advanced manufacturing executives (93%) see the global economy improving, up from 71% a year ago, while 84% expect sector earnings to improve (compared with 58% a year ago). The same percentage expect improving credit availability (up from 68%). This optimism can also be seen in M&A: 73% of executives believe that the number of deals completed by their companies will rise in the next 12 months.

As technology drives disruption, manufacturers are acquiring to adapt to the ever-changing new normal. Acquiring technology, talent, new production capabilities or innovative startups tops the strategic drivers behind acquisitions named by executives (23%), while sector convergence and growth into adjacent business activity was cited by 20%. With the expansion of digital technologies in products and services, as well as on factory floors, acquiring innovation can be faster than developing solutions in-house. Still, almost 90% of executives say valuing these acquisitions is either difficult or very difficult.

Executives also identified trade policy changes and supply chain security as a significant driver for acquisitions. Manufacturers are depending more than ever on their global footprints to provide agility in serving customers in different markets.

Several paths to growth

While acquisition expectations are up, advanced manufacturing executives are increasingly likely to expect growth to come from within existing operations. Three-quarters (75%) of sector executives now see growth within their company coming from organic sources. Manufacturers have increased their focus on organic growth for the past few years as macroeconomic conditions have improved. In sectors such as chemicals, leaders are noting that organic sources are playing a greater role in revenue increases than M&A — a reversal of market conditions four to five years ago. This does not mean that M&A will not be part of the growth playbook. Those deals just might be more tailored to complement existing business and fill in technology.

Advanced manufacturing executives are also evenly split among developing new products, growing existing business in their domestic market, and entering new markets and sectors as paths to growth. This could suggest uncertainty about which path to growth is optimal, leading manufacturers to pursue several strategies to leave their options open.

This split could also suggest that manufacturers are optimistic on growth across the board. More than half of executives expect revenue growth of at least 11%–15%, consistent with what we have been hearing from individual companies on quarterly earnings calls. Among the most confident are companies that have invested in innovative products or are building deeper customer relationships through service-driven offerings.

Advanced manufacturing executives are also evenly split among developing new products, growing existing business in their domestic market, and entering new markets and sectors as paths to growth. This could suggest uncertainty about which path to growth is optimal, leading manufacturers to pursue several strategies to leave their options open.

This split could also suggest that manufacturers are optimistic on growth across the board. More than half of executives expect revenue growth of at least 11%–15%, consistent with what we have been hearing from individual companies on quarterly earnings calls. Among the most confident are companies that have invested in innovative products or are building deeper customer relationships through service-driven offerings.

Potential hurdles

To be sure, uncertainty remains, as 34% believe slowing economic activity is the greatest external risk to business growth and 40% are looking to reduce overhead and administrative costs to increase financial flexibility.

Meanwhile, increasing production costs (21%), new market entrants (17%) and slowing demand (14%) are seen as the most significant challenges to growth plans. Companies in aerospace and defense have been able to increase prices to preserve margins, though in an otherwise low inflation environment, rising raw material and labor costs can be a particular challenge to growth.

Still, amid the more positive growth outlook, advanced manufacturing executives are looking for opportunities to maximize their growth. Acquisitions can provide a more diverse footprint and supply chain to allow manufacturers to react rapidly to change. The ones that can act quickly are likely to benefit, while slow movers risk becoming the targets or seeing their futures disrupted.