Acquisitive manufacturers are ready to pounce.

Pandemic lockdowns may have tempted a few white-collar workers to binge view Netflix, or get better acquainted with their Pelotons, but corporates took the opportunity to ramp up their productivity to historic levels. ? Recent data compiled by Refinitiv reveals that M&A deal makers have been hyperactive throughout the coronavirus era.?With an astonishing 35,218 deals announced between January and August 2021, even the normally restrained Reuters couldn’t resist hyperbole, describing the numbers as “record breaking” and “breach(ing)new heights” [i]. ?The cumulative eight-month transaction value of $3.6 trillion already exceeds a typical full-year tally[ii] and the frenzy shows no signs of diminishing.?In a CNBC interview, Andrea Guerzoni, EY Global Vice Chair for Strategy and Transactions, confidently predicted “a fundamentally strong market moving forward.” [iii]

My personal hunch is that consumer manufacturing businesses will be one of the most important contributors to this ‘fundamentally strong market’.??They might not figure amongst the largest (Warner Media / Discovery) or most headline grabbing (CD&R / Morrisons) deals, but – like filling an Olympic pool from a hose pipe – the steady flow does, over time, make a difference. Consumer & manufacturing deals such as Coca Cola and Bodyarmor, can prise open opportunities for the benefit of acquiror, acquiree and customer. Speaking about the former, Mondelez CEO Dirk Van de Put highlighted the benefits to both distribution and brand [iv].??Moreover, most of these deals are completed to combine the power of two strong brands – such as the recent acquisition of Fortenova Frozen by Nomad Foods for € 615 million.?Fortenova’s two anchor brand enjoy strong consumer recognition and the number one market position throughout Eastern Europe, whilst Nomad is Europe’s leading frozen food company.

The business drivers for M&A within the Consumer & Manufacturing sector have evolved in recent years, as have the challenges which preoccupy c-suite executives, and the acquisitions which they pursue are likely to reflect this.??Of course, there are many factors that make M&As attractive to cash rich companies, including shifting the profit margin needle, expediting product diversification, and giving an immediate platform in new, emerging markets.?In addition, I’d highlight three features that are of growing importance within the manufacturing sector itself.

Controlling the supply chain

?For 20 years, western manufacturers rushed to offshore critical elements within their supply chains, confident that just-in-time freight logistics would be sufficient to maintain operations.??Many are now revisiting these decisions, and British manufacturers, more than most, are finding that changed circumstances demand changed solutions.??In his webinar ‘What is the impact of coronavirus on supply chains?’, Malcolm Harrison, CEO of the Chartered Institute of Procurement and Supply, asks the rhetoric question: “What price would you put on resilience?” [v].?

In isolation, the disruption to supply routes caused by the global pandemic would have been a poignant warning to home-based manufacturing bosses.?However, Covid-19 arrived hot of the back of Brexit upheavals, trade wars, soaring freight costs, and rising concerns about the carbon footprint from bulk cargo and just in time delivery solutions.??For these reasons, I expect more firms, keen to reduce their dependence on factors beyond their control, to acquire strategic suppliers within their supply chain.?In yesteryear, the M&A spotlight might have favoured complementary products and services; when the vulnerability of the supply chain has been ruefully exposed, the appeal of vertical integration is hard to resist.

A recent example of this approach being successfully executed was the acquisition by Ocado of a majority stake in the indoor produce grower, Jones Food Co, with an option to increase the position to 70 per cent - the investment was earmarked to support the building of three more UK farms [vi].

Opportunistic deals as an inflexion point in the economic cycle

?It can’t be long before the economic sections of the Sunday broadsheets are instructed to carry health warnings, as the onslaught of dire news takes its toll on the nation’s blood pressure (uncontrolled inflation, escalating cost of living, energy shortages, factory closures, debt pile-ups).?However, every downturn creates opportunities for those with the necessary appetite and cash pile.??

Our industrial estates and business parks overflow with fundamentally sound businesses who, as the economy pivots, could secure their futures by exploring new ownership.??They might have great products and a loyal customer base; however their credit lines are inadequate to see them through a few lean months.??They might face a short-term squeeze due to the collapse of a strategic customer or default of a distributor.?Or they may be an owner-managed business whose proprietor has been waiting for the right moment to cash out and head for Spain’s golf courses.??In any of these scenarios, the prospect of economic hard yards could be the catalyst to bring forward the timing of their exit event, to the benefit of both an eager seller and a buyer looking to stabilise its market position.

?Innovative partnership and collaboration structures

M&A represents the most extreme method of exerting influence over other businesses, but it also conjures risks and downsides.??The Harvard Business Review has reported that between 70% to 90% of acquisitions fail to deliver the expected outcomes [vii], often because the consequence of the transaction is to throw a wet blanket on the attributes which had made the target successful in the first place.?Suddenly, the gung-ho entrepreneurial spirit engendered by the founders is smothered by the bureaucracy, policies and governance processes of a long-established corporation.??Like mixing grapefruit juice with milk, the combination can veer between unpleasant and toxic.?

Fortunately, there are mechanisms which – with a degree of imagination – will deliver the benefits of a ‘pure’ acquisition without all the attendant hassles.??I expect minority strategic stakes, perhaps through the creation of joint venture vehicles, to become increasingly popular.??These allow firms with different competences, cultures, and operating models to commit to one another in a more enduring manner than a simple supply contract would allow, but without jumping directly to a full-blown takeover.??Such arrangements can even contain provisions for the eventual buy-out of the smaller firm by the larger on pre-agreed terms once it achieves a certain size and stability. ?

Joint ventures have been widespread in the rapidly emerging and complex market for the production and assembly of autonomous and electric vehicles. ?BMW, Ford, Mercedes Benz and Volkswagen were all involved in establishing Ionity, which will be creating a network of charging stations.?Volkswagen and Northvolt set up a JV to manufacture lithium-ion batteries. And Bosch and Mercedes Benz are collaborating through a vertical JV to develop urban automated driving using an app-based ride hailing service [viii].

I will be particularly interested to see how these structures enable the most open-minded players to win in the fight for talent. In many countries, labour markets have become the tightest in recent memory, especially for those with expertise at the technology cutting edge.?Collaboration structures could be a compelling option for the next generation of tech entrepreneurs as they survey their options.

In closing…

For all these reasons and more, we can expect the evolution of the consumer & manufacturing sector to be heavily influenced by M&A and joint ventures activity throughout the 2020s. ?The strategic goals will be varied - to bolster the product offering, to de-risk the supply chain or to secure new expertise for the changing business landscape.?In addition, canny leaders will always be conscious of the impact on real estate – which invariably means early data collection during due diligence followed by a portfolio optimisation exercise to ensure the footprint is aligned with the commercial opportunities.

For further information, and to discuss how M&A could impact your business, please contact [email protected] or [email protected].

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[i] https://www.reuters.com/business/global-markets-ma-2021-08-12/

[ii] https://thesource.refinitiv.com/thesource/getfile/index/41afdcdb-6615-4026-baa8-906de1767bfd

[iii] https://www.youtube.com/watch?v=2g0q4xHEkxI

[iv] https://www.cnbc.com/2021/05/27/mondelez-ceo-calls-2-billion-chipita-acquisition-a-win-for-both-companies.html

[v] Building Resilient Supply Chains through Coronavirus | CIPS - YouTube

[vi] https://www.thegrocer.co.uk/mergers-and-acquisitions/ocado-boosts-stake-in-vertical-farming-specialist-jones-food-co/647817.article

[vii] https://www.forbes.com/sites/forbescoachescouncil/2019/06/24/most-mergers-fail-because-people-arent-boxes/?sh=1b5870a52770

[viii] https://www.pinsentmasons.com/out-law/analysis/joint-ventures-future-of-mobility