Chris Rawstron, Partner and National Head of Corporate at Irwin Mitchell, explores business confidence in the manufacturing sector and highlights what it could mean for future mergers and acquisitions (M&A) activity for the remainder of 2018.
It’s certainly been a mixed picture for the UK manufacturing sector since the turn of the year.
Recent monthly statistics from the UK Purchasing Managers’ Index show that output continued to slow in February, and that manufacturing as a whole lost further ground after hitting a four-year high in November 2017.
Although consumer, intermediate and investment goods sectors all saw a slowdown during the month, there was some positive news shown by the increase in new orders, at a faster pace than in January.
According to the influential report, companies highlighted that domestic demand was better and new export business was also rising.
It was also pleasing to see that, overall, UK manufacturers’ outlook remained positive. Indeed, over half (56%) of the companies surveyed at the end of February said that they thought their firm’s output would be better in a years’ time, with only 6% expecting a decline.
Ongoing expansion and expected future output growth also boosted job creation in February with new positions increasing for the 19th month in a row.
At the same time, however, the study found that manufacturers have had price increases on a range of commodities and raw materials, resulting in average input costs rising fast in previous months.
It’s an unpredictable sector but, outside of the many surveys about how the sector is performing, on the ground we are seeing investment at the higher tech end of the sector. The recent commitment by Toyota to build the new Auris model in the UK also shows that, despite the many challenges and the uncertainties associated with Brexit, manufacturing remains an engine for growth.
Impact on M&A
Manufacturing was our most active sector for deals last year, but what does the current nature of the manufacturing sector in the UK mean for M&A over the next 12 months?
As is often the case, an uncertain economic picture tends to hamper deal activity. This was the case across all sectors last year, with a 5.5% fall in deal volumes in 2017 compared to 2016.
The impact on the manufacturing sector seems to have been even greater. In fact, according to Experian’s MarketIQ database, annual deal volumes in the sector fell to 1,507 in 2017 compared to 1,805 in the previous 12 months, which represents a 16.5% fall in volume.
Although the sector continued to be the second most active, just behind financial services and ahead of infocomms, the combined total value of all deals fell 38% from £142 billion to £88bn.
Faced with a challenging and uncertain sector, it would be safe to assume that volumes and values will continue to fall in 2018. According to analysis of Experian’s MarketIQ database so far this year, this looks likely to be the case with only 160 sector deals currently recorded in the first two months with a value of £3.5bn.
Despite the 16% fall in the number of manufacturing transactions between 2017 and 2016, an interesting and developing trend we’re seeing in the data is the increasing proportion of international deals.
Last year, 9% of deals had an international aspect to them; with a significant proportion involving either a US-based target or acquirer. In 2016, the proportion of international transactions was just 7% but already this year we are seeing this figure remain at 9%.
From our experience, this is something that we’re seeing across our client base. We’re pleased to say that, despite the uncertainty here in the UK, there are some businesses that are keen to tackle the uncertainty head on, take matters into their own hands and take advantage of acquisition opportunities in different countries.
Irwin Mitchell Deal Highlights
Anatolia AS – Acquisition of Whitworths
AMT Limited – Joint venture with Midwest Prototyping LLC
Hills Numberplates Limited – Acquisition of US-based John R Wald
Begbies Traynor (administrators) – Sale of The Great Northern Envelope to Encore Envelopes
Investacast Ilfracombe – Acquisition of Investacast Ilfracombe on behalf of private investors
Montrose Group Limited – Acquisition of Thunderbolts Group Limited
Published: April 2018
Focus on Manufacturing - Edition 7
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