Does Mergers & Acquisitions for Engineering Businesses make sense in the UK?

We don’t make anything in Britain anymore … do we? That’s what I keep hearing, but it’s not my experience.

Whilst the country may no longer be full to the brim of car manufacturers with household names, there remain a lot of SMEs quietly going about their business employing skilled engineers making quality components or equipment. And while the names of those companies are largely unknown outside their niches, many of them supply into the multinationals including Rolls Royce, Airbus, Jaguar Landrover, BAE Systems, Boeing and MBDA.

Factors facing these businesses have ebbed and flowed over the last few years. Exports have been in the doldrums as the European and global economies have worked their way through a downturn. But with things now picking up, or at least stabilising in Europe, things look more positive. For those exporting, weaker sterling has provided a welcome boost over the last year. Meanwhile, the UK boasts leading universities in the world for engineering and mathematical graduates, and with less millennials attracted to a highly paid career in financial services, maybe this will provide a boost for the UK’s engineering sector.

So can we look forward to a positive future for engineering and manufacturing? In a recent survey by BDO looking at Q2 2017 for the East of England¹, 38% of companies saw a reported rise in output, while 36% of firms saw a rise in new orders from a flat start to the year. Recruitment has also improved with 8% of firms on a recruitment drive. While there is uncertainty ahead, it is not all doom and gloom.

Looking at the sector from an M&A perspective, there seems to be a healthy level of activity in the East of England as well. At Forward Corporate Finance, we help our clients buy businesses, sell businesses and carry out management buyouts. Having only started our own business recently, we are fortunate enough to be working buy-side for one engineering client and sell-side for another.

Through our research, what has become apparent immediately is that there is a pattern across the engineering sector. There is a handful of extremely large businesses in the sector and a plethora of smaller, but niche businesses. These smaller companies are great businesses, but often they are grappling with issues which might make it difficult for them to continue to scale, such as lack of funds for investment, or difficulty in attracting the right calibre of staff, or just that the founder has run out of energy or ideas.

In our view, the small businesses make excellent M&A targets. They often have:

• a specific niche;
• a really close tie with their customers;
• some excellent staff that have been with them for many years;
• an appetite for growth;
• a difficulty to access the right finance to enable them to grow;
• an inability to hedge against foreign exchange risks;
• poor access to export markets;
• no time for in house training programmes

Whilst acting for our acquisitive client, the characteristics above were demonstrated by all the targets we approached. When acting for our small client on sell side, we knew we had to find a medium sized business that could bring the synergies to the table, to enable the growth pains our client was facing to become opportunities for the medium sized business.

Do I think this is a unique set of attributes only demonstrated by engineering companies in the UK? No, this is true of other sectors in the UK and their respective M&A activity.

However, do I think there is a real opportunity for consolidation of the UK’s engineering business capabilities? Yes I do.

There are great small engineering businesses out there, they have assets you can touch, order books you can see, relationships with customers that are real and excellent skilled staff. They all have the same growth pains. Bolt them together with a medium sized business and the risks become less of an issue, the opportunities become the focus, together they can make “Made in Britain” their unique selling point to the world.

¹ BDO Q2 Manufacturing Outlook Survey

Rob Dukelow-Smith