The next wave of M&A in advanced industries: Are you prepared?
With COVID-19 continuing to spread and the pandemic disrupting normal life, few business leaders are green-lighting M&A transactions. Out of an abundance of caution, many deals have been held back or abandoned altogether. While M&A activity might remain limited in the very near term, we expect to see it increase dramatically when the path to economic recovery comes into focus.
In the wake of the 2008 financial crisis, a wave of M&A transformed advanced industries including the automotive, machinery, semiconductor, electronics, aerospace, and defence sectors and the post-2020 wave promises to be larger and more disruptive. Now is the time for a call to action: industrial CEOs need to prepare. This is the moment to lean forward, shape the future of the industry, and set the stage for the next S-curve of innovation, growth, and leadership.
High-performing industrial companies have been undergoing digital transformation for a few years now, but they have been doing so at an uneven pace. Many focus their efforts in specific pilots for example, using the industrial Internet of Things in factories, digital-thread engineering, and predictive analytics in servicing giving them the edge in automating processes while delighting customers and moving sales motions online through e-commerce.
With digitization, companies in the broader industrial segment could raise revenues and margins by as much as 4 to 7 percent, which translates to an increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) of up to 9 percent.
Over the past two or three decades, supply chains have grown increasingly global, with every link in the chain optimized and little slack tolerated across the system. But digitization of the supply chain didn’t keep pace. While companies knew their immediate suppliers well, they lacked visibility into the full spans and layers of their suppliers, so they couldn’t see all the potential vulnerabilities.
Shift toward ACES
Advanced industries have felt the impact of ACES (autonomous, connectedness, electrification, and shared mobility) trends for several years. Tech players have brought significant innovation to the sector, but much work is left to do to transform hardware and global infrastructure into areas that can handle the shift.
Thinking big and transforming through M&A
As industrial companies rethink their growth strategies for the post pandemic environment, we expect that many will find M&A critical to their quests for value creation. We further expect to see seven M&A themes—areas in which a company needs M&A to achieve its strategy and in which it can add value to targets—that reflect the sector-shaping trends:
- Leverage M&A for scale and consolidation. Companies will consolidate at the OEM and supply-chain levels to reduce fixed costs, gain competitive scale, increase downturn resilience, and strengthen supply chains.
- Realign portfolio, products, and channels. Companies will divest unprofitable geographic locations and noncore businesses, especially as they focus on the strategic assets in their portfolios. They will expand into new products built around their core businesses and rely more heavily on autonomous processes and electrification.
- Expand into services. Companies will offer maintenance and other services (such as mobility as a service and fleet management). They will enter the maintenance, repair, and operations; aftermarket; and parts businesses.
- Enhance digital capabilities and digitize. Companies will implement data analytics to support the customer experience and value-added services they offer. They will also use next-generation software, telematics, and digital capabilities to enable improved products and operations.
- Regionalize the supply chain. Companies will revamp their supply chains (for example, through on shoring and export control).
- Increase sustainability. Companies will embrace electric-mobility infrastructure, electric-mobility-battery technology, urban air mobility, autonomous-flight systems, and electric propulsion to meet demands for sustainability. The companies that can both create conviction in riding the trends and execute their M&A strategies should find themselves ahead of the pack coming into the recovery. Those that strive for top-quartile performance will stretch their rethinking even further and consider this moment as a time for real transformation.