Attracting the Investors in Manufacturing

Manufacturing Global Magazine April 2018

By Paul Teuten and Rory O’Sullivan

Sweeping changes in technology are disrupting nearly all sectors of the global market. In the home, the shop floor, the factory and the hospital, and even our daily commute, technology is leading to huge changes in commercial business models. Why should manufacturing be any different?

This is the new industrial revolution – Industry 4.0 – and as with any rapid change, new opportunities have arisen and new ways of thinking have emerged. However, there are also new hurdles to overcome for businesses large and small.

Naturally, much of the limelight goes to the product themselves, and the innovative manufacturing processes behind them are often overlooked. In the public sphere, news has predictably focused on the high street and the latest consumer gadgets. Concepts like driverless cars and personalized tech from wristwatches to fridges have grabbed headlines and the imagination of consumers and businesses alike.

Manufacturing is arguably where we are seeing the biggest technological innovations, which have attracted investors attention. ‘Ransomware’ and ‘crowdfunding’ might be the most recent tech buzzwords for the public, but for manufacturing enterprises and investors, ‘cyber physical systems’, ‘cloud computing’ and ‘artificial intelligence’ are just as exciting. It is hard to overstate the scalability of this market: growth in the enterprise and industrial software markets is set to continue, with the lion’s share in Europe. In fact, by 2020, the Boston Consulting Group estimates that companies will be spending about $123.74 a year on such software – more than a six-fold increase on 2015.

Manufacturing will be the leading industry, with a 22% share of this investment spending, which exceeds both utilities and transport. The adoption of Industry 4.0 themes is incredibly diverse, with far-reaching consequences. Predictive manufacturing, self-optimising production, smart response and automated inventory management are just some of the niche areas that have exploded in recent years.

These developments make the manufacturing space ripe for M&A, with the physical and digital worlds converging rapidly in front of us. Each individual merger and acquisition has a straightforward objective: proximity to the key data, which is likely the real value add to the customer. The ultimate goal is a complete vertical that enhances the solution for the customer. That’s exactly what Industry 4.0 can tap into.

It is relatively early, but business strategies have already changed vastly yo accommodate these aims. First and foremost, data has become a central proposition for many companies. It’s no longer enough for firms to offer services or products – it’s the data that customers value.

As the value of data has become apparent, factories and industrial plants have evolved. Companies have embedded a whole solution for data capture, connectivity, interpretation and analysis – often using artificial intelligence to learn from data, pre-empt issues and future-proof business practices. For example, using data, factories across the globe can now ‘communicate’ through their machines – and if an issue occurs in one factory, the other plants can learn from it before the same thing occurs at their location.

Judging by recent trends, manufacturing firms that own and exploit data have set themselves up for success in an increasingly competitive marketplace. For this reason, they are also most likely to be targets of M&A activity. In addition, being technologically driven makes them more aligned by design. By seeking to streamline their processes and becoming more efficient and cost effective, these companies have made themselves even more attractive from an M&A perspective.

Finding such companies can be challenging, but manufacturing investors have two vital acquisition criteria. First, they’re looking for businesses of scale – of which there are few within the technology area. Second, they’re looking for targets whose technology is proven to drive commercial sales. Businesses have been willing to pay a premium to acquire companies that meet these criteria.

The M&A process is not without its pitfalls. The constant evolution of the industry means that joining two companies together can be problematic. Today, very few businesses are simple. Complexity can delay or even derail M&A deals, especially given the overwhelming background of change in the manufacturing models.

Larger companies, by their very design, cannot react as quickly as smaller organisations; these nimble tech firms are not only able to hold their own against larger, more established groups, but are often winning over customers with their solutions. As a result, the larger groups need to address how they compete and whether an acquisition of a smaller tech firm would redress the balance with customers. However, these smaller companies are often owner-managed startups and have a very different ethos and set of values than the acquirer.

But, importantly, they are also likely to have a different opinion on their valuation than established businesses, which can be a substantial hurdle to overcome. Typically, smaller, technology-rich targets expect to be valued in anticipation of the opportunity they represent. This is a hard sell for traditional conservative industrial groups, which are used to paying modest historical multiples of profit rather than future multiples of revenues. This is the area where an experienced financial advisor is most able to help.

Another key issue to contend with for M&A is the drive to automation as a replacement for human workers. A recent report from the UK think tank, Centre for Cities, indicated that a total of 3.6mn UK jobs could be replaced by machines. In fact, it predicted that jobs at the highest risk of replacement included retail sales, customer services, administration and warehouse work.

As key players seek to solidify their strategic positioning, span value chains and create growth opportunities for unique value propositions, the pace of investing and M&A activity is expected to accelerate. The sheer diversity of Industry 4.0 is opening up a myriad of opportunities. However, it also produces hurdles that must be overcome for M&A in manufacturing to be successful.

The ultimate Industry 4.0 takeaway is this: Companies across the manufacturing spectrum can’t afford to stand still. If you want to be at the forefront, you must embrace technological change and seek to integrate new technologies with your traditional practices.