Three Manufacturing Mega-Trends Impacting the Middle Market

Bill May | May 10th, 2016 | MMG

The manufacturing sector of the U.S. economy hovers around 12 percent of gross domestic product. Two decades ago, it accounted for approximately double the current figure, or 23 percent of GDP; however, U.S. manufacturing companies will likely experience a substantial uptick in the next three to five years, as three substantial manufacturing trends converge.

Mid-market manufacturers and financial institutions should consider how to respond to the opportunities that present themselves. By understanding these trends and implementing appropriate strategic changes, such as modifying how they assess potential clients, businesses will have the opportunity to reap huge economic rewards.

Below is an overview of three major manufacturing trends on the horizon.

Shortage of Technical and Managerial Resources
The manufacturing sector has been shrinking for nearly two decades, as indicated by its share of GDP. Offshoring, lower labor rates abroad, and explosive growth in the Asia Pacific region have led to a downward spiral of the domestic manufacturing sector. The recession in 2007 further exacerbated the situation by decimating small to medium-sized manufacturing enterprises.

Meanwhile, the prestige around manufacturing jobs has waned and millennials have sought careers in other industries, damaging the pipeline of new workers for manufacturing. In an effort to combat the shortage, manufacturing entities reach down into smaller manufacturers to replenish their dwindling workforce. Small and midsize manufacturers that can deal with the shortage of talent will continue to grow.

At a recent roundtable event of small to medium manufacturers, many of the owner-operators spoke of the how they’re addressing attrition of capable employees. Some are creating their own in-house apprenticeships and employee training programs; others are searching for ways to create entry-level jobs without negatively impacting their already slim margins, allowing them to evaluate how new employees assimilate to the manufacturing environment.

One way to create entry-level jobs is to apply simple low-cost automation, allowing businesses to alter the work structure and increase output per employee; create relatively simple tasks (e.g., loading machines, cleaning a factory, etc.); and provide a way to evaluate and train new employees. Owners of midsize manufacturing companies must not only focus on how to be competitive now, but how to continue to be competitive into the future. Not a small task!

Transition of Baby-Boomer Owners
The demographic shift occurring as baby boomers age will dramatically impact small and middle-market manufacturers over the next several years as owners retire.

Some estimates indicate that nearly $1 trillion of ownership equity will change hands annually over the next 10 years. Other experts foresee a significant liquidation of small companies with minimal exchange of equity—the outcome is likely somewhere in between. Almost assuredly, the number of manufacturing ownership transactions will grow exponentially.

If prepared, financial institutions, banks, private equity and transactional services organizations will flourish in this environment. Understanding the specific needs of mid-market manufacturers is critical. Building relationships with owners, and understanding their personal connection to their businesses and how to meet their specific needs will be essential to your success. Merger and acquisition opportunities will be numerous for manufacturing entities—if they’re prepared to deal with the intricate nature and complexity of the midsize manufacturers. For an owner, turning over a business he or she has built from the ground up is like giving up a child, and clear thinking may be difficult.

North American Manufacturing Growth
North American manufacturing growth is not guaranteed, but socioeconomic and political pressures are increasing. A shift in mindset will need to occur relative to the social and economic status quo. The most likely outcome will be a renewed focus on manufacturing.

Historically speaking, manufacturing jobs have a multiplier effect on the economy. According to the Economic Policy Institute, a Washington, D.C., think tank, manufacturing provides a nearly 3 to 1 multiplier relative to job creation, which trickles over into other sectors beyond manufacturing.

Today, the manufacturing sector has a wage premium of nearly 11 percent for workers with less than a college education. Data indicate that 19 percent of millennials have a college degree (or, put differently, 81 percent do not), placing members of this generation in a position to benefit from growth in the manufacturing sector—ultimately a boon to the American economy.

What Does the Future Hold?
Opportunities for improved margins and organic growth in small and midsize manufacturing businesses will explode, and manufacturing economic activity will flourish. As the U.S. manufacturing sector grows relative to GDP, the domestic manufacturing sector will begin to look more like that of Mexico (18 percent of GDP), Japan (19 percent) or Germany (23 percent).

Small to medium-sized manufacturing entities must have a plan to deal with all three of the mega-trends described above. Financial institutions, banks, private equity investors, merger and acquisitions advisers and transactional services firms must also ramp up and prepare for this economic shift.

The indicators that this socioeconomic transition is coming are already visible, and the economic and political climates are set. Is your organization prepared to exploit these opportunities?


Bill May is the founder and president of High Value Manufacturing Consulting. HVMC is based in Tennessee and provides extensive manufacturing consulting experience, helping to serve small to midsize manufacturers through quick response solutions that net high value manufacturing results.  

GNC sale to launch in September – sources

Provided exclusively by Mergermarket

GNC (NYSE: GNC) is expected to kick off a sale process next month, four sources briefed on the situation said.

The Pittsburgh-based vitamins and supplements retailer has not yet sent out books to prospective bidders, two of these sources said.

Chinese investment group Fosun International (HKG:0656) and pharmaceutical companies Shanghai Pharma (SHA: 601607) and SinoPharm (HKG: 1099) are among the potential suitors for GNC, the first source said.

GNC and Fosun declined to comment. Shanghai Pharma and SinoPharm were not immediately available for comment.

After reporting weak 2Q16 earnings, GNC announced in late July the departure of CEO Michael Archbold and suspended its earning guidance and share buybacks. GNC appointed Director Robert Moran as interim CEO.

A person familiar with the matter said Moran likely wants to take a look at various alternatives before committing to a sale and that there is no firm timeline for a process. Moran formerly served as CEO of specialty retailer PetSmart.

This news service in July reported that GNC was drawing early interest from Chinese suitors. This spring GNC said it had hired Goldman Sachs to explore strategic alternatives.

Chinese private equity firms may be interested in GNC through a partnership either with a Chinese strategic buyer or a US strategic, said the first source. He said in the latter scenario, the PE firm would manage GNC’s expansion into the Chinese market.

There is a strong appetite among Chinese buyers for US health and wellness buys as China’s middle class grows and consumers place a higher value on products from the west rather than locally produced, this news service previously reported.

Still, one of the sources said he was skeptical of Chinese strategics’ ability to pay a high valuation for a business that needs to be turned around.

Even if GNC’s business stabilizes, and it has in the past proven to have decent margins and generated good cash flow to support leverage, the deal will have to be a low EBITDA multiple as there is not much growth left in the business, this source said.

GNC currently trades at around 6.5x TTM EBITDA. The stock has declined more than 20% since the July earnings announcement.

A Chinese buyer could roll out the GNC brand in China as a big new market for its products, a sector advisor said. But he said he expects suitors will have less interest in operating GNC’s existing brick-and-mortar stores in the US.

The fact that GNC has not yet started to explore a sale may indicate that the company has not received strong interest for either parts of or the whole company, a second sector advisor said.

by Yiqin Shen, Bhavna Kaul and Nick Clayton in New York and Ling Yang in Hong Kong

As seen in the mergermarket newsletter on 16/08/2016

A Qualified Opinion with David Melcher of the Aerospace Industries Association

David Melcher | April 26th, 2016 | MMG

This story appears in full in the May/June 2016 issue of Middle Market Growth.


Retired Lt. Gen. David F. Melcher is president and CEO of the Aerospace Industries Association, the most authoritative and influential trade association for the aerospace and defense industry. Representing more than 300 manufacturers and suppliers, AIA’s strong advocacy is essential to protecting the interests of the industry while helping to establish new growth opportunities. Following a 32-year career in the U.S. Army, Melcher joined ITT Corporation before becoming the inaugural chief executive at Exelis after its spinoff from ITT in October 2011. Melcher also led Exelis through a successful merger with Harris Corp. in May 2015.

Q. AIA HAS MORE THAN 300 MEMBERS. CAN YOU TALK A BIT ABOUT WHAT YOUR ORGANIZATION DOES FOR THEM?

Small and midsize companies are the backbone of our industry. More than 70 cents of every dollar coming to our industry through federal contracts flows into the supply chain through subcontracts. Companies come to us to help them make connections with the giants of our industry, which we provide through our Supplier Management Council. They come for advice on how to make sense of government customer buying habits and to offer improvements to the acquisitions process. For example, AIA is experiencing success in getting new equipment certification streamlining provisions for aircraft in House Transportation and Infrastructure Committee Chairman Bill Shuster’s multiyear FAA reauthorization bill. Additionally, we have been actively promoting a “regular order” appropriations process that results in timely enactment of the $1.07 trillion in federal discretionary spending for fiscal year 2017 called for in the Bipartisan Budget Act of 2015. Stability in expectations is what helps our companies best support our government customers and manage contracts on time and within budget. […]

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4 Steps You Don’t Want to Skip in the Due Diligence Process

Why You Shouldn’t Ignore the People Factor
If your business lives in the mergers and acquisitions space, you know it’s all about due diligence. You know you need to have the financial and legal pieces locked up. But, what about the people piece?Believe it. As a private equity firm looking to acquire an organization, part of the process would be to scrutinize its human resources infrastructure – discover its vulnerabilities and liabilities. To help ensure a successful deal, don’t overlook these four steps in the due diligence process.

  1. CULTURAL INTEGRATION

Identify the primary organizational focus, how the business is run and whether it can work with your current holdings or as a standalone.

Your PE firm has its way of running business – your own culture – as does the company you’re acquiring; and they’re rarely the same.

Let’s say your firm is an orange and you’re buying a banana. What does it mean for an orange to own a banana? The life cycle, how it grows and its needs are all different. If the orange really wants the banana, what is it going to have to do to ensure the banana thrives? The banana should get to stay a banana – unless it’s rotten. Then, you’re going to have to make a fruit salad.

A cultural integration plan will pinpoint what’s needed to maintain the historical success of the organization. What does that organization’s culture look like moving forward? Misalignment or misidentification of a company’s culture is one of the main reasons acquisitions fail.

  1. REGULATORY COMPLIANCE

Is your target organization in compliance with workers’ compensation, Equal Employment Opportunity Commission laws, the Affordable Care Act, wage and hour laws, OSHA and records management?

There’s a lot of i’s to dot and t’s to cross here. Be aware that not finding out about issues such as sloppy documentation or timekeeping at the outset may be a major liability once the deal closes.


As a private equity firm looking to acquire an organization, part of the process would be to scrutinize its human resources infrastructure – discover its vulnerabilities and liabilities.


  1. LEADERSHIP TEAM ALIGNMENT

What are the strengths of the organization’s leadership team? How aligned are they around the vision, strategy and plan for the company. The more aligned they are, the healthier the company.

Some alignment red flags:

  • Each leader has a different view of how the company is doing, its successes and its future.
  • All the leaders agree, but their vision doesn’t support the company’s customer promise.

What you need to determine is the degree of misalignment – is it a stream or the Grand Canyon? Then, decide how you’re going to move forward, and who moves forward with you.

  1. COMPENSATION AND WORKFORCE REVIEW

Assess the company’s salary practices and job duties to determine how they compare to the market. Find out where the gaps are and what it will cost to fill those gaps. Having to close gaps in the salary structure may affect the price you offer.

Also review the salaries of senior people. If it’s a top-heavy company, you may need to make a decision about who stays and goes upon acquisition. What kind of expertise do you need and how much will you have to pay for that expertise?

Look at possible workforce reorganization needs and identify the cost implications and potential areas of concern, such as a loss of institutional knowledge or backlash over layoffs.

FIND OUT MORE

These are just a few of the areas where taking an early look at the human capital issues involved in mergers and acquisitions can help save you time, money and resources. Find out more about the benefits of having a human capital infrastructure in place during the due diligence phase at insperity.com/acg.

Sharon Dye is a human capital consultant with Insperity who helps clients in the middle market space define their goals, overcome roadblocks and improve overall organizational performance. In the past 27 years, she has played an integral role in pre-deal and post-deal due diligence for mergers and acquisitions nationally and internationally. She has a talent for helping companies impacted by reorganization, restructuring, mergers and acquisitions, leadership changes and corporate culture challenges.

The Growth of Alternative Payments in Healthcare: 3 Considerations for Investors

By Patrick Pilch

The shift to value-based reimbursements from volume-based fees stands to significantly impact business models and competition in the healthcare industry. And with that shift well underway—the Centers for Medicare and Medicaid Services (CMS) launched a bundled payments program in April 2016—investors in the healthcare space need to understand the effects, trends and opportunities that new alternative payment methods provide.

In the BDO PE Activity in Healthcare Report: How Bundled Payments Will Impact Healthcare Investment, we explore takeaways and implications for investors looking to succeed in healthcare amidst the changing regulatory landscape.

  • Bundled payments are on the rise. CMS’ first mandatory bundled payment program focuses on the outcomes of Medicare-covered hip and knee replacements from surgery through 90 days after initial hospitalization. This payment model changes how care is managed—specifically, with regards to post-acute care providers—and reimbursed. While this first program is centered on joint replacements, CMS’ goal is to tie 90 percent of all Medicare payments to quality or value-based outcomes by 2018, indicating that bundles will likely grow into other areas. Additionally, commercial payors tend to follow CMS’ lead when it comes to payment methods; thus, interest in bundles will rise in 2017. Post-acute care investors should take the time now to assess the future impact of bundled programs on referrals and revenue.
  • Investor interest in post-acute care will increase. As the business of healthcare adapts to regulatory changes, investor interest in the post-acute care space—including long-term care facilities, rehabilitation facilities and home health agencies—is growing. In 2015, a total of 79 deals were reported in this space, up from 71 in 2014. Additionally, deals were valued at $5.92 billion, compared to $1.67 billion in 2014. And while the quantity of private equity deals in the sector decreased in 2015, average deal size was up radically, totaling $2.37 billion, compared to $208.4 million in 2014. With strategic investors and private equity partnering on deals more often, we expect to see rising valuations for post-acute care businesses that can prove they are performing well.
  • Now is the time to scale up. Larger organizations have the upper hand in the changing healthcare environment, as they have the resources to grow and improve clinical care and outcomes, leading to better financial results. Whereas smaller organizations, such as family offices, are burdened by the transformations required to stay in business. Investors should pay close attention to the development of healthcare networks—in other words, the alignment of the hospital, ambulatory care and post-acute care providers.

As the healthcare industry continues to make the change toward value-base reimbursements through bundled payments and alternative payments programs, investors must assess their portfolios for both opportunities and weak links. Success will mean better understanding where they are in the healthcare provider chain and getting savvier about addressing and adjusting to new mandates.

Want to learn more about how CMS’ new bundled payments program and other alternative payments methods impact healthcare stakeholders? Check out BDO’s on-demand webinar, The Impact of Bundled Payments on PE Deal Activity in Healthcare, and keep up with the BDO Center for Healthcare Excellence and Innovation by following us on Twitter at @BDOHealth.

Patrick Pilch is managing director & national Healthcare Advisory leader with the BDO Center for Healthcare Excellence & Innovation. He can be reached at ppilch@bdo.com.

ConEdison retail electricity sale to Constellation Energy the result of an auction, CEO says

Provided exclusively by Mergermarket

Consolidated Edison (NYSE: ED) conducted an auction before selling ConEdison Solutions’ retail electricity and natural gas business to Exelon-owned (NYSE:EXC) Constellation Energy, said Mark Noyes, CEO of ConEdison Solutions.

Noyes described the three-month long sale process as “thorough.” A handful of strategics participated in the sale, with the group narrowed down to a smaller group in the past few weeks, Noyes said.

This morning, Baltimore-based Constellation announced the acquisition of ConEdison Solutions’ retail business today for an undisclosed sum. Noyes and Constellation President Mark Huston both declined to comment on the deal’s valuation and the financing for the deal.

Constellation was the leading bidder in the auction, Huston said. ConEdison’s retail electric business appealed to Constellation because the business line was owned by a top-tier seller adjacent to Constellation’s current territory, he said.

From a strategic standpoint, ConEdison in June 2015 looked at the separation of its retail electricity business from its regulated utility business due to its competitive power unit’s “volatile earnings” cycle, Noyes said. The seller intends to redeploy sale proceeds around ConEdison’s utility-scale solar and wind project development, Noyes said.

As of 31 December, ConEdison was the sixth largest owner of North American solar power assets with 1,062 megawatts of solar and wind projects in service or development and a USD 1.7bn three-year capital budget.

The deal requires Hart-Scott-Rodino approval and is expected to close as early as 1 September, Huston said.

ConEdison’s retail business has 560,000 customers in 12 Northeastern, Mid-Atlantic and Midwestern states, as well as Texas and the District of Columbia, according to a press release.

Exelon acquired Constellation in an April 2011 merger valued at USD 10.4bn.

UBS advised ConEdison on the sale and Baker Botts was its legal advisor. Day Pitney was the legal advisor for Constellation Energy.

by Michael Schoeck in New York

As seen in the mergermarket newsletter on 27/07/2016

Executive Suite—Brian Pitera

Interview with Brian Pitera, Principal, Grant Thornton LLP

This article is brought to you by Grant Thornton LLP. It appears in full in the May/June 2016 issue of Middle Market Growth.


WHY DID IT MAKE SENSE FOR YOU TO JOIN GRANT THORNTON?

Brian Pitera: Grant Thornton’s acquisition of Blossom Growth Partners is in line with the firm’s strategy to provide clients a holistic approach through the entire transaction life cycle, including performance improvement. The Grant Thornton platform will allow us to scale our capabilities with the use of the firm’s 6,000 resources across the United States. And it makes perfect sense for Grant Thornton to expand its offering of performance-improvement solutions to existing and potential clients. We don’t tell clients what can happen with a business. We take them through what should happen and help them implement change. My team and I—who remain focused on value acceleration—are excited to have joined Grant Thornton.

HOW DOES YOUR TEAM HELP OWNERS CREATE VALUE?

BP: A transaction shouldn’t focus on where a company is today, but on how it can grow and what it can be in the future. At Grant Thornton we work with the owner and management team to help the business reach its full potential. It’s also important to note that everyone on our team has had a career on the company side, working within management and the executive team. We have all walked in management’s shoes.

We look for opportunities to drive quick wins and longer-term plays. Even the best management teams sometimes have a hard time stepping back from the day to day to assess the bigger picture, and they often begin to accept inefficiencies within the company. At Grant Thornton we have the ability to look at the company with a fresh perspective, correct inefficiencies, help the company run better and create new opportunities to add value.

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Brian Pitera is a principal in Grant Thornton’s transaction services group. He focuses on operating services performance improvement and buy- and sell-side operations diligence.