New orders, increased revenue and an expanding workforce 

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According to the 2017 Monitor survey, the percentage of thriving companies (43 percent) represents a small increase over 2016. The industry has seen an increase in employment levels among 65 percent of manufacturers (by as much as 20 percent), with more hiring expected in the coming months.

New orders and production have grown as well, with global and regional PMI indices noting several consecutive months of strong purchasing growth. Most Monitor survey participants expect to increase revenues in coming months, with 36 percent anticipating an increase of 11 percent or more.

This optimism is reflective of the middle market generally. The RSM US Middle Market Business Index (MMBI) posted a record high of 132.1 in the second quarter of 2017. This is the second consecutive record-high reading for the quarterly index and reflects underlying improvement in economic conditions during the past year, as well as strong corporate earnings and expectations for significant tax reform and regulatory relief this year.1 Whether these expectations will be met is another matter.

In a sector-driven economy, some manufacturers will fare better than others: More than half of biotech and life sciences manufacturers describe themselves as thriving, a somewhat surprising outcome given the sectors’ weak performance in the stock market in 2016.2 Nearly half of building materials companies—45 percent—are thriving as well, but this is to be expected in a robust real estate environment: Even as costs are increasing, strong job gains, rising wages, changing demographics and historically low interest rates have offset inflationary, financial and policy headwinds and resulted in a strong real estate market. In addition, technologically advanced sectors are experiencing strong growth.  .

On the other hand, only one-third of metal fabricators registered as thriving in the Monitor. About 30 percent of chemicals, petroleum and plastics manufacturers are thriving, with the majority holding steady.

How are manufacturers growing?

When it comes to sales growth strategies, almost half of manufacturers are offering new or improved products. Many have also expanded—or are planning to expand—in new or existing markets. These markets are predominantly domestic, but there is activity crossing borders as well. Collaboration with customers and investments in innovations as well as research and development are accelerating new product introductions. 

Mergers and acquisitions as well as joint ventures were relatively widespread growth strategies—and this trend is expected to continue in the coming months. Just over one-third of survey participants acquired one or more companies (or divisions or units of a company) in the past year, and a similar percentage plan to do the same in the coming year. This activity may be fueled in part by an increasing desire to procure technology and technical knowledge, particularly in Germany, Japan and China.3

Sectors seeing the most acquisition activity (or planning it) include building materials, industrial and commercial machinery and auto suppliers. It’s worth noting that these sectors have a slightly higher percentage of thriving companies than the aggregate. Yet only 13 percent of survey participants are planning activity on the sell side. This gap will likely drive M&A deal prices higher, especially for companies with sales and profitability growth.

Foreign direct investment in manufacturing was only slightly higher for non-U.S. manufacturers compared to U.S.-based enterprises, reflecting confidence in worldwide growth plans. But a majority of survey participants plan to increase or sustain their level of international business.

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What this means for manufacturers 

Is M&A the right choice?
Deals are scarce and valuations are increasing, so businesses must be judicious about the deals they seek and conduct. Middle market companies can struggle to manage the priorities of growing a business, making it more difficult for buyers to implement a successful transaction strategy while avoiding delays.

Many executives extol the virtues of growth, but growth itself isn’t a strategy. Management must perform comprehensive research in order to understand their companies, their competition and acquisition targets to justify increased investment designed to generate sustainable returns.

Many organizations underestimate the effort necessary to truly merge two organizations and don’t spend enough time planning the integration. It pays to perform an effective due diligence and/or synergy analysis, then plan and manage integrations properly to optimize deal value and mitigate risk. Buyers need to plan transactions carefully, from identification of compatible candidates through due diligence to final integration.

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1RSM US Middle Market Business Index, (Q2, 2017) RSM US LLP and the U.S. Chamber of Commerce
2Chandra, T. “Biotechnology: Is 2017 a Bonanza Year?” (Jan. 9, 2017)
3Industrials & Chemicals Trend Report, Q1-14, 2016, MergerMarket