By | March 17, 2015
Although many industry experts are still reluctant to call the ongoing resurgence in U.S. manufacturing a widespread phenomenon, several trends lend support to the conclusion that manufacturing once again has become a relevant and meaningful component of U.S. economic growth.
These trends have become important drivers of investment into the sector – so much so that in 2014, manufacturing was the top destination for private equity investment. This year, too, manufacturing is at the top of the charts: Thirty four percent of participants in BDO USA’s Sixth Annual Perspective Private Equity Study believe that manufacturing will offer them the greatest investment opportunity in 2015. On the Axial network, manufacturing is also the sector with the highest level of investor interest.
Below are several of the trends that are making manufacturing M&A such an appealing strategy in 2015.
A Strong Macro Picture
While recent sentiments call for a slowing in the U.S. economy within the next year or two, its relative strength over the past few years has undeniably provided tremendous support to the manufacturing industry.
Total manufacturing output topped out at around $2 trillion in 2013, according to the National Association of Manufacturers, and growth — fueled by strong domestic demand that in turn enabled U.S. factories to override the slowdown in global markets – continued strong in 2014. In fact, manufacturing growth recorded its largest increase in nine months last November as production expanded across the board.
While sectors such as machinery, apparel, technology and oil and gas had solid gains, Federal Reserve data recorded a 5.1% jump in automobile production – a sector that has had a long and painful recovery, but is almost back at full employment and that has already been an active spot for M&A deals.
Reshoring: Slow but Steady
A.T. Kearny’s inaugural 2014 Reshoring Index, the first in a series of studies that examines the rate and pace of the return of manufacturing operations to the U.S., showed that offshoring to foreign manufacturing markets still outpaces reshoring in the U.S.
But reshoring is a slow process that takes time to bear fruit, so though the trend is ongoing, and companies in a range of sectors including computers and electronics, appliances and electrical equipment, metals, furniture, plastics and machinery have been bringing production back onshore, it will be a while before certain companies can reap its benefit.
Others, however, have already benefited from bringing production back to the U.S., supported largely by lower energy prices and the impending energy independence in the U.S.
Manufactured Exports Strong, but Onshore Sales Gain Importance
Last year, exports to the top buyers of U.S. manufactured goods – Mexico, Canada, China and Japan – showed a strong increase. While this trend could be tempered by the continued strength of the U.S. dollar, which makes things more expensive for those countries that are importing goods, many U.S. manufacturing companies are increasingly realizing the benefits of producing and selling domestically. As such, many companies are setting up manufacturing sites that are close to developers and suppliers so as to reduce the time from design to production and sales, and to avail of technology and process innovations.
Low Manufacturing/Labor Costs in the U.S.
According to research from the Boston Consulting Group (BCG), the competitive edge of a number of countries that were traditionally regarded as low-cost manufacturing bases – China, Brazil etc. – has eroded significantly over the last ten years. Average manufacturing and labor costs in those countries are now estimated to be higher than those of the U.S.
The U.S., in fact, has emerged as the lowest-cost manufacturing location of the developed world, according to BCG, and a growing number of small-and-medium sized companies have been availing of that trend, enabling them to save significantly on labor and manufacturing costs and expand their businesses. Some companies are also producing in Mexico, where costs are low and proximity to the U.S. offers a strong competitive advantage.
Niche Industries, Changing Consumers Important for “Long Tail Marketing”
From specialty furniture makers to designers of “green,” eco-friendly fashion, one of the most significant trends in U.S. manufacturing is the increase in the number of entrepreneurial ventures. These highly successful and innovative niche businesses are catering to the changing tastes of the U.S. consumer, and for private investors or larger conglomerates looking for new opportunities, those companies that can demonstrate value potential, that show potential for scalability and growth, could be interesting acquisition targets at time when long tail marketing is becoming more important.
Outlook Positive for Manufacturing M&A
In 2014, global M&A activity topped out at a hefty $3.5 trillion, according to data from Thomson Reuters, a 47% increase from 2013. Ten of the 15 largest acquisitions last year were for companies based in the U.S., where volume climbed by 51.4% to $1.53 trillion.
The activity was particularly strong in manufacturing. PWC reported that total deal value in the manufacturing sector reached $127 billion in 2014, an increase of 163 percent over the prior year, and a new ten-year high.
According to KPMG’s 2015 M&A Outlook Survey, M&A professionals expect 2015 to be an extremely active year for deals, based on their confidence that economic and market conditions in the U.S. will remain positive. Eighty-two percent of survey respondents said that their companies or clients will initiate at least one acquisition in 2015, up from 63% in 2014.
Many corporations and strategic acquirers seem eager to engage in the M&A environment and put their coffers to work — particularly in manufacturing M&A. There was nearly a 400% increase in strategic acquirers focused on the manufacturing sector from 2013 to 2014 on Axial.
Given these trends, 2015 is expected to be a vibrant time for both buyers and sellers of manufacturing businesses.
- See more at: HereFor additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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