Is Manufacturing M&A on Track for Resurgence?

Businesses and industries around the globe have been upended by COVID-19—and manufacturing is no different. In early March, companies in the U.S. tried to get a handle on the financial impact of the pandemic, with 62% implementing cost-containment measures. By mid-June, this figure jumped to 81%. Deal activity was also impacted. While global mergers and acquisitions have seen a recovery during the second half of 2020, the recovery in manufacturing has been relatively muted.

In the first half of 2020, manufacturing globally secured a total deal value of $26.2 billion, a 46% decline and 21% decline in deal volume when compared to the first half of 2019. The most significant drop-offs in M&A activity were experienced when the pandemic took full effect in Q2 2020, with a 63% decline in deal value and 36% decline in deal volume, when compared to Q1 2020. Manufacturing M&A began rebounding in Q3 2020, but dealmaking cooled off in Q4 2020 as COVID-19 started resurging across the U.S., Europe and Asia.

Deals in the second half of 2020 were driven by access to capital by way of private equity and special purpose acquisition companies (SPAC). SPACs have no commercial operations and are designed specially to raise money through initial public offerings (IPOs) to buy another company. Overall, the manufacturing deal value and deal volume declined by a significant 40% and 28%, respectively, in 2020 compared to 2019.

In looking to the New Year, the challenges and uncertainty experienced in 2020 due to COVID-19 and the financial ramifications will likely continue into 2021. COVID-19 has disrupted dealmaking, from scenario planning to investing, and preparing for a previously envisioned future, but deal activity in the first half of 2021 will continue to recover from sector lows seen during the peak of the crisis.

The following drivers will help support a resurgence in manufacturing M&A activity:

Changing political landscape: With the transition to a Biden administration, governmental regulation, higher income tax rates and a softened position on trade may be on the horizon. This is all contingent on who controls Congress, which will be known come January. Governmental changes paired with COVID-19 resurgence could make capital markets more volatile, which would be unfavorable for dealmaking.

Future of capital: 2020 was the year of SPACs, a driving force for M&A activity with more than 50% of all IPOs in the U.S. this year represented by SPAC IPOs. SPACs have allowed development-stage companies quick access to capital to scale operations. Increased SPAC activity will continue in 2021 with areas such as EV-charging infrastructure, power storage and 3D printing.

Opportunities in innovation: With companies planning for a recovery from the pandemic, they will continue to invest in additive manufacturing, digital factory, digital supply chain solutions and technologies related to sustainability. Businesses and supply chains took a major hit, and moving forward, they must become smarter and more agile. Investing in technology capabilities could increase machine-based manufacturing, improving efficiency and reducing the risk of operational disruptions like COVID-19.

Prior to the pandemic, companies were already considering ways they could diversify and lower their supply chain costs, and COVID-19 accelerated the need to do so. Such efforts could open the door to more M&A opportunities.

Shifting industry paths: As the pandemic forced shutdowns across the world, overall consumer spending and travel plummeted, leading to a softening of many industries. Companies in the individual leisure space such as recreational vehicles, outdoor furniture and sporting equipment are positioned for success as local lockdowns are announced. Manufacturing end markets that have been hard-hit such as automotive and aerospace & defense will need to evaluate measures to maintain or improve their current positions.

As companies emerge from the pandemic, M&A activity in the sector will be fueled by access to emerging sources of capital, investment in innovation and the right-sizing of operations to meet new market demands of a post-pandemic world. COVID-19 has caused unprecedented challenges, but businesses can use M&A to solidify and add value to their business – divest where possible, and invest where necessary.

Paul Elie is Industrial Products Deals leader, PwC US.