THE NEW DEAL FOR DEALS

A surge in manufacturing M&A activity is underway. Business leaders shared perspectives at Chief Executive’s Dealmakers Forum 2021. Some takeaways.

BY DALE BUSS

THE APPETITE FOR MERGERS AND acquisitions on both sides of the manufacturing business is immense these days. It’s fueled by pent-up demand from the Covid pause, the robust post-pandemic U.S. economy, the continued availability of ample and cheap capital, the rethinking of supply chains, the imperative for digital transformation, the fast-rising ESG agenda and the arrival of thousands more business owners every year to the portals of retirement. So, when Chief Executive hosted Manufacturing M&A: Dealmakers Forum 2021 recently, we found an “We’re bullish on this being a engaged group of mid-marstrong M&A year.” ket manufacturing owners —Dena Jalbert, Founder and CEO, Align Business Advisory Services and executives who were eager for inspiration and guidance about how to navigate this surprisingly fertile new era for selling and buying companies. The value of global M&A activity dipped below $2 trillion in 2020, to about $1.7 trillion, for the first time in several years. But particularly for manufacturing, the second half of 2020 brought a rebound in activity. “And we expect that to continue in 2021,” said Dena Jalbert, founder and CEO of Align Business Advisory Services, a consulting firm in Winter Park, Florida. “We’re bullish on this being a strong M&A year.” In particular, she said, volume has grown for “downstream” transactions in lower, mid-lower and mid-market segments whose share of deals has grown versus larger deals.

Shearman & Sterling’s George Casey concurred. “The M&A market now is up and running again,” said the global managing partner of the New York-based business law firm.

While coronavirus-related production halts and supply-chain disruptions basically ground manufacturing M&A to a halt a year ago, Jalbert added, a second-half rebound last year is continuing its climb in 2021.

A snap poll of Forum attendees ratified these prospects: fully 38 percent of them said they’re “ready to buy,” with an acquisition in their crosshairs at the moment, and a significant additional cohort responded that they’re “waiting and watching for now.” And the aim of 56 percent of attendees, answering another poll question, is to use M&A to enter new markets, geographies and customer groups; the second most popular reason is to cut costs, build economies of scale and enhance products suites to sell to existing customers. Nearly one-quarter of respondents were seeking to purchase access to a key technology.

Seizing Control

Supply chains have burgeoned as a focus of M&A activity because so many companies

were disrupted last year. “We’re going to see a lot of investment there,” Jalbert said. “Folks want to take control of that and not be so dependent.” Similarly, she said, the pandemic proving ground accelerated the urgency of digital transformation. “There’s going to be a lot of investment in technology to make manufacturing more efficient,” Jalbert said.

Many CEOs are leaning into such bullish expectations, some with an eye toward the ultimate significance of today’s field of M&A dreams. “In moments like these when we’re facing true disruption, we get to ask the question: What value do we bring to the society in which we live and work?” said Barbara Humpton, president and CEO of Siemens USA, the Washington, D.C.-based American arm of the German industrial giant. “What role will we play?

“Will we do it ourselves, with an expanded company built out of mergers and acquisitions, or will we partner and create ecosystems? All of those tools are available to us today.”

Time to Move

Jalbert described factors that combined to create the strongest manufacturing M&A market in some time. One on the demand side is the availability of capital, both cash and debt, to eager buyers, including strategic corporate acquirers, private-equity firms, special-purpose acquisition corporations and more. Interest rates are at an all-time low “and will be for the foreseeable future,” she said.

“Financial sponsors are sitting on trillions of dollars of capital that has been raised yet not deployed,” Jalbert noted. “And as shareholders expect renewed growth in 2021 after what was a down year for many companies, the fastest way to growth is through acquisition. It brings speed versus organic growth.”

A second deal driver on the demand side is that most PE firms remain anchored to a “buy-and-build” strategy of consolidating a number of acquisitions into a larger entity for better return on equity after the fact, rather than making one huge buy.

“The idea of being kind of the aircraft carrier and the speedboat,” she said. “Speed boats are more flexible and nimble, and there’s more ocean to travel at a faster clip, whereas the big aircraft carrier [isn’t able to grow as fast or] get as much ocean because it moves slower.”

A major bullish factor for M&A activity on the supply side is that Covid was a litmus test for many operations, illuminating for CEOs that some didn’t or can’t perform and no longer fit. “Corporate divestitures are going to become a key trend in M&A, and organizations might divest non-core assets that [weren’t] benefiting them the way they thought they would,” Jalbert said.

So much competition from buyers awash in capital means that sellers can get strong valuations and demand cash. “When sellers are looking at term sheets and they have four or five of them that are 100 percent cash and one’s got an earn-out, you’re just not competitive if you’ve got an earn-out,” Jalbert said.

But mid-market buyers can help equalize the playing field significantly by how they leverage debt. “Many organizations want to partner with growth-minded [companies] and help fund” acquisitions, she said. “Traditionally, people think of going to their banker and getting a line of credit, but [there are] many different types of private lenders that have different types of facilities in terms of structures and ways of doing things.”

Doing the Deal

Casey advised that negotiating a good deal begins with both sides understanding their own interests—and those of the other side. “The key to this is really listen more and talk less,” he said. “Very often we may project, and we may assume, that they want something that actually they are not focused on. They may [even] take less than what we are willing to give.”

To get to a win-win deal, he said, a side might have to “let them win some so that we can also win [the] points that are important to us.” A party may even “not start from the most extreme position” but instead “find a middle-of-the-fairway approach.” He explained, “Start where it would be good for you but at the same time where the other party will look and say, ‘You know what? This is “Do not fall in love with the assets of the deal.” —George Casey, Global Managing Partner, Shearman & Sterling

USING THE CEO’S VOICE

Siemens grew its footprint and strategic position in the U.S. market by leveraging some important acquisitions and divestitures, positioning the 173-year-old company ideally for a new economy that emphasizes digital capabilities, adaptable human capital, sustainability and flexibility. In 2007, Siemens acquired UGS, a Texas-based industrial software company, for $3.5 billion. “That provided the core that ultimately enabled us to bring manufacturers the ‘digital twin’ platform, Siemens’ capability to create a virtual simulation of an entire factory,” says Barbara Humpton, CEO of Siemens USA. “We’ve continued to leverage that foundation of software,” she said, adding that Siemens has invested about $40 billion over the past 15 years to expand on it. “In the process, we’ve reinvented ourselves into the Barbara Humpton, largest industrial software President and company in the world, which CEO, Siemens USA really is what brings us today to where Siemens [supports] 90 percent of the Fortune 500 industrial companies,” she said. Siemens acquired big properties in the oil-and-gas-infrastructure business while also divesting operations in health care—and then, last year, moving to divest its energy business including the petrochemical parts. At the U.S. helm since 2018 after a seven-year rise at Siemens, Humpton advised the Forum on how she lends her voice to negotiations. Often,

Siemens forms an M&A arc with a customer or a supplier organically, where the companies work together, teams get to know each other, and then say, “‘Hey, we’ve been selling together. What if we just made this a package?’” Humpton said. “’This is actually something that would be stronger as a single entity.’” But the relationship may fray amid the reality of negotiating an actual deal, and that’s when a CEO should come in. “I like to use my voice to overcome what appears to be friction,” she said. “Sometimes you need that sort of different perspective that says, ‘Oh, folks, these are surmountable issues we’re dealing with.’ Or perhaps you come to a point where you say, ‘These are insurmountable issues.’ And that can be an outcome, too.” actually reasonable. I can work with this counterparty.’”

Other advice from Casey: Embrace auctions. Sellers may fool themselves into thinking they’ve got the upper hand because, after all, the asset in question is theirs. They may believe they can strike a quick deal, particularly with a familiar counterparty. But buyers can always delay or even walk away.

“Auctions are the seller’s best friend,” said Casey, explaining that auctions allow sellers “to really control the process and the timing, keep the competitive dynamic and [make] sure the deal gets done.” Plus, they minimize the time that the M&A process might take.

Buyers should ensure they’ve conducted complete due diligence so they don’t get tempted to overpay in an auction. If they really want the target, buyers should try a “preemptive” [offer] to pay “the fair price. It will be a full price. And the seller may be willing to do that,” Casey said. “Being straightforward and honest with full integrity [can lead] to a great deal in that type of situation.” Understand total value. It’s also critical to take a holistic approach to determining the value of the transaction and the risks, rather than focus only on the purchase price. Long-term supply agreements, for example, can actually have more value than the purchase price. On the obverse, a liability exposure “may actually derail the deal [or] bring the buyer to his knees after the deal is done.”

Also, Casey said, some buyers exploit this reality by taking a “salami-slicing” approach in which they agree on a purchase price and then “break the negotiation into pieces where, at the end of the day, [the buyers] actually come out from salami-slicing with a better value for them and much less value for our side of the table.” Read the room. CEOs deal with people all the time, but M&A speaks its own body language. “Maybe they get puzzled and you see the expression on their face,” Casey said. “Maybe they’re closing down; their arms get crossed. There must be something you’re saying triggering that reaction, and you need to figure out what it is. Also be aware that we are signaling [to] the other side.

“Aggressiveness really comes across in a very negative way and tends to backfire,” he added. “[It’s] better to really project charisma [and positivity], making sure that we come across as somebody who wants to build that relationship, who wants to build trust with our counterparty.” Be prepared to walk away. “Is it a must-do deal at any price?” Casey advises clients. “Do not fall in love with the assets of the deal. Try to stay as objective as you can in the transaction.” CE

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