Despite a decline in M&A activity overall during 2023, there have been several bright spots. In particular, there has been a resurgence in interest by buyers looking to acquire manufacturing businesses in the U.S. This, in turn, has pushed average valuations higher compared to 2022.
But what factors are driving buyer interest in manufacturing over, say, retailing which has seen a marked slump by comparison?
An uptick in manufacturing M&A
BizBuySell’s Insight Report – which tracks deal activity in the middle market – noted a 13% year-over-year increase in deal activity in Q3 following an eye-opening 45% growth in Q2. Buyers were also willing to pay more, with the median sale price up 28% over the previous year and 36% over the previous quarter. Businesses ranging from lumber and wood products to medical devices remain in high demand.
Consumer spending has driven activity (but is short-term)
Certainly, part of the answer is the overall macroeconomic background. Manufacturing, particularly manufacturing of consumer goods, exists to meet the needs (and wants!) of Americans. Consumer demand increases when more Americans are in work, and since the pandemic, we have seen a sustained period of high employment. The U.S. unemployment rate stands at a measly 3.6%, with nonfarm payroll jobs increasing by 336,000 in September (U.S. Bureau of Labor Statistics.).
Consumer confidence has, however, started to show a pullback in spending, and industry commentators such as the Conference Board, anticipate a short and shallow economic contraction for the first half of 2024 (see here.) Manufacturers are already anticipating this. The Institute for Supply Chain Management’s latest survey found that the U.S. manufacturing sector continued its contraction trend but at a slower rate, recording its best performance since November 2022, when the PMI® also registered 49 percent. Companies are still managing outputs appropriately as order softness continues, but the month-over-month PMI® improvement in September is a clear positive.
This short-term outlook seems out of step with the spike in M&A activity over recent quarters.
Bigger, structural changes
Supply chain vulnerabilities exposed by the COVID-19 pandemic and more recently by geopolitical tension (e.g. Russia’s invasion of Ukraine, and escalating concerns about China) have, we would argue, been two large and more structured structural factors that have driven a resurgence in interest in manufacturing in the U.S. A third is the unprecedented investments facilitated by U.S. Federal Govt legislation, including the CHIPS Act and Inflation Reduction Act.
As a result of these three factors (and likely others), we have seen significant reshoring and nearshoring of manufacturing capacity. The Reshoring Initiative tracked 210,495 jobs announced as having been returned to the U.S. in 2022 (see report here). The desire to reduce reliance on foreign manufacturing, particularly in China, and bring production closer to home has almost certainly fueled M&A activity.
Concept and Perspective 