19
“The Department for Business, Innovation and Skills recognises the current competitive edge of
UK players over developing nations in specialised sectors”
Additionally, in terms of UK clients,
foreign competitors require a longer
lead time to complete jobs because
of the distance and shipping issues.
The Department for Business,
Innovation and Skills recognises the
current competitive edge of UK players
over developing nations in specialised
sectors; “Low wage economies tend to
specialise in relatively high volume / low
technology manufacturing sectors (e.g.
clothing, machinery and equipment),
while the UK is relatively specialised
in knowledge intensive sectors…” This
suggests the UK should be well placed
in the near term to weather some of the
competition from emerging economies,
though in time emerging economies
could become more competitive in
knowledge intensive sectors.
26
Pricing considerations may also be
reducing with Engineering UK reporting
in 2015 that the number of companies
returning production from countries
such as China is outstripping those
moving output overseas. This has
been attributed to shifting consumer
preferences, a reduction of the wage
gap with emerging economies, volatile
international transport costs, a desire
by management to better control
quality and supply chain risk.
2
THE MERGERS AND
ACQUISITION MARKET
Precision Engineering is fast becoming
an asset class in its own right. In August
of this year, Private Equity Investor
Warren Buffett’s Berkshire Hathaway
acquired one of the US’s largest
Precision Engineering Companies
- Precision Castparts - for $32bn,
a record acquisition for Buffett.
38
Precision Castparts began life as a
small company and during its history
of more than 60 years,
39
one of its
key mechanisms for growth has been
the strategic acquisition of dozens
of smaller Precision Engineering
firms, which has left it with over
150 manufacturing locations.
40
It seems that some of the same
economic drivers that already
motivate Private Equity and trade
buyers operating at a smaller scale
in this market, were attractive in
this deal: With the majority of sales
to customers made on individual
purchase orders generated from
long-term agreements, Precision
Castparts has predictable income
41
,
a significant proportion of tangible
assets
41
, exposure to an expanding
manufacturing market (in this case
mainly Aerospace and Energy)
42
, and
benefits from the availability of regional
government grants
43
. Additionally,
although Citigroup calculates Berkshire
Hathaway is paying a price of 15-times
expected 2018 earnings for Precision
Castparts, Forbes suggests that, “the
deal may be cut at a price where it
quickly adds to the value of Berkshire
Hathaway”
44
as a result of strong,
potentially double digit earnings
as energy end markets stabilize,
margins improve and aerospace firms
re-accelerate their parts orders.
In the UK, like the USA, there is an
active M&A market for Precision
Engineering companies with
published deal transactions 2013-
2015 averaging £4bn per year.
45
In terms of mergers and acquisitions,
commentators expect activity in the
UK Precision Engineering market to
be particularly notable in the sectors
where the UK has developed significant
competitive advantage, e.g. aerospace,
automotive, flow products, offshore,
power and precision electronics. Those
acquiring these interests are likely to
include purchasers from emerging
markets, in particular from countries
such as Brazil, China, India, Indonesia,
Mexico and South Korea, although the
most likely purchasers for these assets
will be cash rich US industrial groups
23
and UK and US Private Equity firms.
In addition, Precision Engineering
businesses in the UK which can
contribute to the growth strategy of
Private Equity firms are likely to attract
their attention. This may be in the form
of providing access to overseas markets,
or where the investments will provide
appropriate platforms for buy-and-build
programmes which may require on-
going rounds of investment in order to
build a company with scale which will be
appealing to strategic buyers on exit.
23
The current success of automotive
and aerospace sectors in particular
is fuelling an increasing interest in
Precision Engineering companies in
those fields, with the likely entrance
of new aerospace manufacturers
looking to acquire established
companies with the technology and
suppliers necessary to compete
with well-known manufacturers.
Mark Short, of Ernst and Young’s
Global Automotive and Transportation
Industry Leader Transaction Advisory
Services, feels that, “The automotive
sector is the leading industry sector
for driving future transactions…
Stronger balance sheets, combined with
continued debt financing opportunities,
are positioning automotive companies
to embark on a new wave of
transactional initiatives. Middle-market
transactions - those valued up to US
$250 million - will comprise the bulk of
deals in the sector. Continued focus on
expanding core product opportunities,
coupled with increasing the mix of
new products and services, are key
criteria for driving M&A activity.”
Since the majority of deals are
private acquisitions and divestments,
tracking the changing hands of
Precision Engineering entities is not
easy and tracking those for which
performance has not matched
projections is particularly difficult.
Measuring investment performance
in unquoted companies is always
challenging as the market data is not
readily available and conventional
analysis tools such as indices and
other benchmarks do not exist.
However, there is evidence of profitable
deals being struck (see table on the
following pages) and an astute and
experienced investment management
team should be able to unlock the
value in the smaller entities.
