How tech factors into manufacturing M&A

You might find a few companies that offer products, services or capabilities that you want to incorporate and that fit the right profile for size and location. However, a deeper analysis of technology can reveal unexpected disconnects or concerns.

Douek recalled a company that was evaluating a technology solution provider, hoping that the solution would help streamline the acquiring company and also become a product to drive growth. However, diligence revealed that the product was not a good fit. “When they started looking at the solution, they realized that there wasn’t as much there as they thought. There were some things they expected to be automated which were actually manual, and the original company was selling the solution because they’d essentially taken it as far as they could.”

“Our clients know their business better than anyone else, but it’s important to consider all of the quantifiable points of validation for a target acquisition,” Douek said.

It starts with access to data. “You need to get into the enterprise resource planning systems and financial systems of the target operation. These are the pathways to understanding,” Douek said. “It's so important to consider data analytics, and you need to review all of the sources of data around an operation, both financial and operational.”

New solutions can help accelerate and expand that analysis. “We’re starting to see solutions that help us reach quicker, more accurate conclusions, much more efficiently,” Douek said. “It’s really exciting — we’re going to accelerate the M&A lifecycle and make better, more accurate decisions around mergers and acquisitions.” Douek listed a few of the key technologies to consider in buy-side due diligence work:

• Advanced analytics for diligence can uncover risks and opportunities by examining the company’s financial health, operational efficiency and exposure across the value chain. This can include evaluating supplier dependencies, production bottlenecks and workforce dynamics.
• Predictive scenario modeling for deal structures helps to forecast future value creation and flag potential liabilities. Manufacturers can simulate regulatory impacts, cybersecurity vulnerabilities and integration costs, to help inform negotiations.
• IT integration strategy that plans for IT alignment early in the process. It’s important to establish data governance frameworks, cleansing protocols and Master Data Management (MDM) for a single source of truth for customers, products, vendors, sites and other domains.
• Digital manufacturing readiness tools like Microsoft Azure IoT Central help manufacturers assess digital readiness and model post-deal operational synergies.

Schindler said both buyers and target companies are turning to technology for scenario planning in transactions, using tools from Oracle, Anaplan, OneStream and others. “They can be a very cost-effective way to have quick analysis that you can perform over and over.”

When manufacturers consider how to acquire new technology, or how to use new technology in diligence, they should also consider some new deal structures.

“It’s one thing if you’re buying a whole company and integrating it,” Douek said. “In some respects, that’s easier — but in manufacturing we’re often seeing carve-outs, where a piece of a business is carved out and sold, to then be absorbed or operated on a stand-alone basis by a new buyer.”

Carve-outs can greatly expand the options for tech-driven M&A in manufacturing. They can also provide competitive advantages, but they aren’t easy. “There is a lot of complexity in that scenario,” Douek said. “You need to know how you are going to separate out your plant operations, how entangled your supply contracts are, and whether those supply contracts are realistic in a stand-alone state.”

Douek recalled another manufacturer that was separating out a business unit which had benefited from its parent company’s high-volume price discounts. However, in a stand-alone state, the business unit’s value required a very different calculation. Technology contracts can include price structures that introduce complex dependencies across an organization’s cost base.

Carve-outs can also introduce a higher level of risk where technology is involved. IT misalignment is a leading cause of M&A failures, and the risk of misalignment can increase when you are buying only part of a company and its systems. Segmentation can also lead to fragmented data access, quality and governance. In carve-outs, it’s especially important to reduce technology integration risks by ensuring that the right roles are involved and informed on both sides.

“For the deals that work really well, the execution has been considered from the earliest conversations and initial diligence,” Douek said. “By the time a green light is given and a purchase agreement is signed, the right people have already been involved and have already had a say in planning the integration and executing the strategy so that it becomes the reality.” To ensure the right roles are involved, you need the right leadership guiding the deal.

Technology introduces a range of new and complicated factors for deal makers in manufacturing, and it can be easy to pursue targets for the wrong reasons or get distracted by the wrong details. “The most important thing is to keep in mind the reason you are doing the deal and how you are going to make it work after the paperwork is done,” Douek said. “That sounds obvious, but it’s amazing how many highly acquisitive companies sometimes lose sight of that.”