New European Invasion:
European manufacturing companies are rediscovering
the American M&A market
In the last six months, GGI has had more inquiries from medium-sized European manufacturing companies about acquisitions in the US than in the preceding three years. What is going on? What are the dynamics fuelling the European companies’ interest in U.S. companies?
In the first half of this decade, the M&A balance between Europe and North America in the manufacturing sector was lopsided: these years were characterized by medium to large-sized publicly-traded U.S. companies looking to preemptively acquire European targets. Smaller American buyers were reluctant and opportunistic at best. Similarly, European manufacturers with the exception of large publicly-traded corporations had been conspicuously absent from M&A activities in the US.
There were a number of reasons for this asymmetrical development in the M&A markets. Foremost among them is of course the economy of the respective countries. The US economy, including its manufacturing sector, snapped back from the double shock of a stock-exchange crash and 9/11 and attained a series of years with decent growth rates. By contrast, most European countries managed to show only anemic growth throughout the first half of the decade. In addition, the manufacturing companies in Europe fell victim to a third blight; an outdated and inadequate business structure that held back productivity gains.
In the 1980s, European productivity gains were continuously high, but going into the ‘90s they started to soften. By the end of the ‘90s, productivity rates in manufacturing had plummeted but nobody seemed to notice in those years of irrational exuberance.
One or two decades earlier, the U.S. manufacturing sector had been subjected to a similar long period of almost flat productivity gains. However, by the late ‘90s when the curve for Europe fell to its nadir, U.S. productivity had already started its long and sustainable climb. The events of 2000 and 2001, dampening demand, threw the economies on both sides of the Atlantic into a recession. While the U.S. economy, helped by the inherent upward push of productivity, soon got back on its feet, the European economies did not get the “push effect” from productivity gains. As the world economy grew, they did get substantial “pull” from China, India and the U.S., but these locomotive effects were not strong enough to pull those economies out of their quagmires. It is true that not all European countries were equally affected. The U.K. showed decent growth rates throughout those years. Despite being affected by the slow-down, France experienced a better economic performance in those years than countries such as Germany, Italy, and Switzerland. The reason for the overall better performance of some European countries versus others is that the relative size of their manufacturing sector in terms of the size of their economy is smaller. In relative terms, Germany or Italy have more important manufacturing sectors than France or the UK. Having said that, the above explanation about the collapse of productivity growth applies to all European manufacturing companies.
What caused the European productivity slump?
In other cases, the introduction of “lean manufacturing techniques” had been delayed by unions and government policies.
Globalization and fierce competition have jolted European decision-makers into action, and after five or six dismal years of restructuring, growth has been restored. In all countries (with the possible exception of Italy where the process is time-delayed but where there are positive trends), manufacturing productivity gains have returned to satisfactory and, in some countries, high levels and are now providing the necessary push to keep the economies on a sustainable growth path.
Having become lean and nimble, these manufacturers know that their long-term success and survival will depend on their ability to:
- become worldwide players in their field/niche;
- secure the key overseas markets (also in the face of perennial exchange rate fluctuation);
- maintain their technology edge;
- nimbly reallocate assets to other locations if necessary.
A very necessary element in seeking to solve these issues is expansion: especially having a manufacturing location in the US which is typically the most important market.
The underlying fundamentals for the “New European Invasion” are of a strategic nature and not opportunistic (exchange rates). Internal GGI research reveals that some of the main criteria that European buyers list as important in the search process are:
- access to market: most important
- manufacturing potential/manufacturing equipment: very important
- existing management: important
- profitability: necessary
- minimum size: necessary
- high profitability/margin: not important
By contrast, large and medium-size American buyers emphasise size and high margins. For them a minimum size of say $40 or $50 m is necessary in order to “move the needle” (the stock market needs to take notice). In addition, they need to be careful that newly acquired business doesn’t dilute their margins: they need to find companies whose performance measured as EBITDA or similar yardsticks is in line with their own performance. As a result, there is a market segment (manufacturing companies between $5 and $50 m) hitherto “neglected” by the large US conglomerates that the new European invaders will set their sight on. Expect competition for companies in this segment and valuations to heat up!