Manufacturing M&A: CEO Tips And Tales From This Frothy Market

In the era before Covid, an overheated brew of PE funding, cheap credit and fast-moving technological transformation drove a thriving M&A environment. Covid cooled things, but now that the virus is (knock wood) winding down, the brew is starting to bubble over, with more than $2.5 trillion in PE funding alone seeking potential targets.

So, how do manufacturers—buyers and sellers alike—navigate this tricky, oh-so-frothy time? We spent the better part of the day yesterday discussing exactly that at our Manufacturing M&A Dealmakers’ Forum, held online. It was a great day full of hard-won wisdom, tips and tricks of the trade. Some of my favorite takeaways:

Buying? Bring cash. With a flood of dollars chasing dear opportunities, all-cash purchases are swamping the more traditional earn-out in mid-market deals. “Every single deal we closed last year was 100 percent cash at closing,” said Dena Jalbert, founder and CEO of Align Business Advisory Services, which focuses on mid-market M&A. “Because of the competition, when the sellers are looking at five term sheets and four of them are 100 percent cash and one’s got an earn-out, you know you’re just not competitive if you’ve got an earn-out.”

Selling? Rent a CFO with deal expertise. “There’s one set of CFO skills for running a business and another for selling a business,” said Howard Lind, CEO of Cicoil, a specialty wire manufacturer that he acquired with a group of private investors in 2006 and sold in 2019 for almost 10x what he acquired the business for 13 years earlier. Lind spent in the neighborhood of $200,000 for the hired financial gun, who stayed through the whole transaction. “That was money well spent,” he says.

Get with the platform. Understanding how the emerging platform economy operates and how you can play is essential for any manufacturing CEO, said Barbara Humpton, U.S. CEO of industrial giant Siemens, the event’s keynote speaker. “In the past, the way manufacturers often competed was on supply-side economies of scale,” she said. “But now, we need to ask the question, ‘How could digital tools actually create exposure to our capabilities, so that makers and designers can create value by tapping into our manufacturing network in a way they’ve never done?’” Her recommended reading: Platform Revolution, by Geoffrey Parker.

Divesting is cool, too. It may not be as sexy as M&A, but mastering divestiture and pruning is essential. “One of the things that’ll happen across the Siemens business regularly is we’ll discover that we’re no longer in a business where we’re innovative leaders,” said Humpton. “The innovations we brought to the table have become more commoditized, and that’s not where we thrive. So, ceding portions of the portfolio to another company who’s perhaps going to address a different market than we’re interested in, that can be a reason to divest.”

To win, go for the win-win, (not the win). Re-think negotiations and look at them as a way to find common ground, said George Casey, longtime head of M&A for Shearman & Sterling. “It’s a way to clearly understand our own interests and even more important, clearly understand your counterpart’s interests. Listen more and talk less.” Oh, and ditch any attempt at gaming the process—the poker face, aggressive behavior, all of it. It just makes people uncomfortable, and it always backfires, said Casey.

Run before the exit. To nail your dismount, create and execute a compelling, written growth plan for 15-25% CAGR over the next three years and make sure you can demonstrate how that performance will continue into the future. That means, for instance, golden-handcuffing key talent, not being overdependent on any client (i.e., > 10% of revs) and keeping score of key KPIs in a dashboard you can show buyers. “Companies that keep score tend to be higher-achieving,” said Patrick Ungashick, CEO of NAVIX, which coaches companies for sale.