5 Reasons Manufacturing M&A Is Still A Growth Industry

Editor’s note: Joel Cohen will be a featured speaker at our upcoming Manufacturing M&A Dealmakers Forum in Chicago this September 9 & 10, giving insight into the 2025 Deal Market. Please join us >

Headwinds are developing for the M&A market in American manufacturing in the short term, but the long term offers only a continuation and intensification of the overall favorable atmosphere for buying and selling industrial companies that has developed slowly over the last several months.

That’s the view of Joel Cohen, managing director and chairman of global industrial investment banking for Baird.

“I feel really bullish long-term that there is going to be a huge amount invested in manufacturing in the U.S.,” Cohen tells Chief Executive. “That means more growth and investment, and with that comes more M&A.”

Cohen indicates that “we are seeing some sluggishness in second-quarter and year-to-date earnings” by many manufacturers. For the group of industrial companies Baird follows, he says, expectations for organic earnings growth for full-year 2024 amount only to a collective low single-digit rate, compared with typical growth in the mid-to-high single digits for recent years.

This temporary lull, he says, is being caused by issues such as the slowdown in the Chinese economy and industrial production growth, as well as the working down of an “overhang” in inventories after U.S. manufacturers protected themselves with excess stockpiling and production coming out of the supply-chain constraints of the pandemic.

“There was overinvestment in some categories, and now we’re seeing a pullback,” he says, mentioning as an example medical/life sciences products, inspired by Covid-era reactions by health-care providers.

Other hindrances to robust growth right now include anticipation that conditions will be better once the Fed starts moving interest rates down, expected beginning in September, and concerns about how the November elections will affect public policy in areas including taxes.

In latter 2024 and into 2025, however, greater manufacturing growth and more M&A activity will be driven by factors including these:

Domestic sourcing: The wave of “onshoring” and “near-shoring” will continue to drive strong growth in U.S. manufacturing, Cohen says. This is a continued reaction to supply-chain problems birthed during Covid as well as greater geopolitical risks and policymakers’ moves to fully domesticate important industries such as microchip manufacturing. “We’ve just started a decade of investment to create security in chips, which is more strategically important than oil to the global economy,” he says.

Digital transformation: The digitization of industry continues apace, Cohen says, as manufacturers try to get more productivity out of their data and become more efficient. “That has created a lot of investment in the industrial world,” he says, in promising new technologies.

Growth categories: Driving outsize shares of manufacturing growth in the years to come, Cohen says, will be sectors including defense spending, artificial intelligence, data-center construction and electricity-grid strengthening. “Some sectors like these will see really high secular growth given their positive long-term demand trends,” he says. “This really matters because it’s hard to get M&A done at attractive valuations if you’re trying to sell a business that isn’t growing.”

Dry powder: Corporate, private-equity and other lending coffers are stuffed with cash waiting to be utilized in M&A activity. “Generally there’s a lot of capital and a lot of cash on corporate balance sheets, and a lot of cash in PE, and people want to transact, but there isn’t a ton of businesses that are actually producing strong enough results to be sold,” Cohen says. 

Automation push: “Every industry is looking to do things more efficiently with automation to take labor costs out, boost quality and improve safety,” Cohen says. “Meanwhile, prices are coming down for robotics and software, and they’re getting better. This area of technology has really taken off, and it’s a big area of investment.”