How can UK manufacturers use a downturn in M&A activity to grow in the future?
In 2023, the scene for UK Manufacturing M&A saw a decrease. Deal volumes dropped by 11%, leading to 706 deals. This was down from 793 in 2022. Despite this, BDO LLP’s insights show a more complex scenario.
Yet, businesses stay hopeful. 26.8% of UK manufacturers plan to buy other companies in the next two years. This shows their readiness to grow and enter new markets. In particular, engineering services are booming, with 28% of all M&A activity.
The end of 2023 brought a spike in M&A activities. Experts think 2024 will be full of opportunities for growth. Engineering services are leading in deals, showing a path for the sector’s renewal.
By smartly using mergers and acquisitions, UK manufacturing could enter a new era. This period would mix resilience with a smart business growth plan.
Current State of UK Manufacturing M&A
The latest BDO report shows a drop in UK manufacturing M&A deals by 11% in 2023. This fall is due to economic pressures that push firms to save money and remain stable.
However, there was a turnaround in the second half of the year. Over 400 deals were made, showing signs of improvement. The report also points out a strong interest in mergers and acquisitions. Specifically, 26.8% of manufacturers are looking to buy other companies in the next two years. The engineering services and food & drink sectors are especially eager.
In terms of UK M&A trends, financing challenges are noteworthy. Private credit is increasingly important. Companies are changing their tactics to seal successful deals. Expert advice highlights good preparation and aligning buyer and seller expectations as crucial for success.
The manufacturing sector remains strong against wider economic challenges. The Technology, Media, and Telecommunications (TMT) sector led the way with 955 deals. The Energy, Utilities, and Resources sector had the highest deal value, reaching £18 billion.
Private equity (PE) was a key player in 2023, making up 42% of all deals and 55% of the deal value. This shows ongoing market confidence. But, UK deal volume fell by 17% in 2023, with deal values dropping from £150 billion in 2022 to £88 billion. This highlights the current challenges.
These figures paint a picture of a challenging yet changing UK manufacturing M&A scene. Despite obstacles, there are plenty of chances for those who are ready.
Key Opportunities in UK Manufacturing M&A
Market insights show a strong move towards UK manufacturing M&A, with one in four manufacturers eyeing acquisition chances soon. The UK’s market growth is fueled by the rise of high-quality businesses for sale in late 2023 and early 2024.
The next general election might hike the Capital Gains Tax (CGT), leading sellers to think about flexible deal terms. They’re considering “earn-outs,” escrow accounts, and insurance for protection. This flexibility lets buyers reduce the price at the deal’s close, adding a safety net financially.
Stable inflation and interest rates are shaping the UK M&A scene positively, with the Bank of England keeping rates at 5.25% in March 2024. These conditions are creating a favourable market for buyers, who can now push for more imaginative deal setups.
Last year saw 793 M&A deals in the UK manufacturing sector, up from 779 in 2021 and 595 in 2020. Private equity was behind 20% of these, showing there’s plenty of capital out there. With capital market conditions expected to improve by late 2024, we see big investment chances.
More than two-thirds of manufacturers investing in digital tech reported significant rewards. This has made them more resilient and efficient. With digital upgrades becoming critical, the push towards more M&A activity in the UK market is likely to keep up until 2024.
Navigating Economic Headwinds
In the UK, businesses face economic challenges. Strategic planning is vital for the manufacturing sector now. The decline in large M&A deals since 2021 shows these issues’ effects. 
But, hope is on the rise. Signs show that economic recovery could be near. Inflation is getting stable, and interest rates might drop soon. The Bank of England might cut rates, which looks good for the economy. This could lead to more strategic buying.
The UK’s productivity growth has slowed since the financial crisis in 2008. However, we shouldn’t lose hope. If manufacturing’s GDP contribution rises to 15%, it could boost the economy by over £142 billion. The overall economic impact is even greater, thanks to the multiplier effect.
Being resilient is key for the UK. It lags in capital investment but excels in innovation. There’s a gap here that strategic planning can fill. With potential tax increases on the horizon, companies are quickly selling parts of their business. This paves the way for strategic buying.
The Industrial, Manufacturing, and Automotive sectors were busy in 2022. Together, they made up a quarter of the UK’s M&A activities. Financial Services led in deals, followed by Industrial, Manufacturing, and then Technology sectors. There’s a wide range of opportunities for strategic deals.
To summarise, strategic planning and good financial forecasting are essential. Especially now, with possible interest rate stability. The manufacturing sector in the UK has a chance to grow strongly and gain a competitive edge.
Impact of Private Equity in Manufacturing M&A
Private equity plays a huge role in the UK manufacturing M&A scene, even as the number of deals goes down. In 2023, these investors handled 42% of all deals, showing their major influence on the industry. They have a big impact because of their financial support.
Deal values dropped to £83bn in 2023 from £269bn in 2021. But private equity kept investing heavily, especially in sectors like tech and healthcare. These areas are big for investors since they focus on innovation and sustainability.
A report by PwC backs up this focus on strategic investments. It shows 56% of senior executives think deals are key for keeping up with market changes. And 21% of CEOs worry about their company’s future if they don’t innovate. This shows how crucial private equity is for growth and staying competitive.
There’s now a smaller difference between what buyers and sellers expect from deals. This means there are good chances for organizations that are ready. With lots of money available for investing, private equity and special groups are keen to find opportunities in the manufacturing world.
There’s more activity in the stock market related to equity and sustainable deals. For companies making products, it’s vital to focus on improving their business. Private equity investment is key for them to grow and be strong in the future.
Sectors Driving M&A Activity
BDO’s analysis highlights the engineering services sector leading in M&A for the fifth year. It shows its continued importance in the market. This field made up the biggest part of deals. It shows strong performance and ongoing interest in engineering services. The materials manufacturing sector also saw a rise in its deal share, from 9% to 13%.
The food & drink industry experienced a slight drop in its deal share. It went from 13% in 2021 to 10% in 2022. Even so, this sector’s deals grew from 79 to 102 from 2022 to 2023. This indicates a return to activity and a focus on merging businesses within this area. Also, the building products and life sciences sectors stayed ahead, displaying steady performance.
UK outward investment went up by 14% in 2022, but inward investment fell by the same rate. This shows a change in how the market operates. Buy-outs made up 19% of all the deals in 2022. This marks them as a key part of market activity. Across different sectors, these patterns show the varied trends and their effects, offering a deep look into the M&A market.
Innovative Deal Structures
The UK manufacturing M&A sector is seeing more complex deal structures. Sellers now use flexible arrangements like earn-outs and warranty insurance. These methods help both buyers and sellers overcome differences in valuation.
There is a rise in creative financing to meet the needs of different transactions. In 2024, the deal volume in the UK fell by 18% from 2022, making innovative strategies essential for M&A activity. The possible rise in CGT is making business owners sell, benefiting strategic buyers.
The Bank of England kept interest rates at 5.25% in March 2024. They may reduce them in the next year. This move has made financial discussions more certain, supporting successful finance arrangements post-deal.
Private equity played a big role in 2023, making up 42% of transactions by volume. TMT, energy, pharma, and healthcare are thriving sectors thanks to these new deal structures.
Acquirers are finding benefits in the added flexibility of deal-making. This flexibility aids in negotiating purchase prices and offers extra security after the deal closes. As financing gets harder and more expensive, innovative deals become crucial. They keep M&A activity alive by favouring a market that rewards acquirers.
Challenges in Post-Transaction Integration
Integrating businesses in UK manufacturing mergers and acquisitions is tough. It involves blending companies and following rules. Merging technology systems needs a well-thought-out plan to combine different IT assets while keeping things running smoothly.
To succeed after a deal, you need clear plans and open talk. Written steps help avoid unexpected costs. But, poor communication can mess things up. Talking openly and often helps solve problems faster, improving integration.
Keeping data safe is crucial. Using strong encryption, keeping detailed records, and controlling data access help. This is important during integration and for meeting legal requirements, making tech merging complicated.
If you don’t check things properly before buying, mistakes can happen. Legal experts need to review everything. This avoids extra costs for things like IT updates, protecting the deal’s success.
After buying, a group focused on combining technology, people, and cultures is essential. Most mergers fail, says Harvard Business Review. Detailed planning is key. Correctly merging staff and systems adds value and reduces problems.
Future Outlook for UK Manufacturing M&A
The outlook for UK manufacturing M&A looks good despite a dip in deals. In 2023, there was an 18% fall in the number of deals compared to 2022. This shows a slow down in deal-making. Deal values also fell to £83bn in 2023 from higher figures in previous years. But, the potential for growth is strong as companies adjust their strategies.
Corporates made up 42% of deal volume, with private equity (PE) leading in deal value at 55%. PE is focusing on sectors like technology and healthcare for big investment opportunities. A recent survey found 56% of CEOs believe deals are key to keeping up with the market.
Finding finance is getting harder and more costly. This has made private credit more important than before. Some sectors like technology and healthcare are doing well, but others are quieter. This means investors must think and act carefully.
The manufacturing sector’s output has fallen to +5% from +20%. Even though total orders are steady, the outlook for future demand has improved slightly. Investment intentions are up, showing faith in future growth despite lower orders. This means manufacturers are investing in new areas.
Business confidence in the sector has been positive for a while. Employment has also seen a rise since the end of 2023. High energy prices and not having enough workers are big challenges. Yet, the focus on resilient supply chains and cutting carbon emissions is likely to help the sector grow sustainably.
Conclusion
The UK Manufacturing M&A scene shows a complex story. Although there’s been a drop in deal numbers, from over 150 monthly transactions in 2022 to 141 in January, 100 in February, and 115 in March 2023, the sector’s interest in strategic growth remains strong. The total value of inward M&A in the first quarter of 2023 reached £12.7 billion. This is a bit more than the last quarter but a little less than the first quarter of 2022.
Outward M&A is valued at £2.9 billion, showing a small decrease. Yet, the UK manufacturing industry stays resilient. This is evident in the focus on sustainability and eco-friendly acquisitions. The move towards ‘Factory of the Future’ concepts, like automation and AI, shows a clear plan for improving efficiency. But, the value of domestic M&A in the first quarter of 2023, at £1.8 billion, was lower than in previous periods.
There’s a noticeable push for cooperation among specialized manufacturers to make processes better and encourage new ideas. The manufacturing sector’s global influence is notable, especially in aerospace, with a 15% market share. But, to grow UK manufacturing further, it will be key to use government support and create a more business-friendly climate. Maintaining a competitive edge through unique R&D and high-quality production is crucial for the UK to stand out in the global market.
