Corporate Finance, Private Equity and M&A as Strategic Option for Crisis Management and an Opportunity to realign Medium-Sized Suppliers
Dr. Michael Hopf
In a survey on the impact of Covid-19 on German suppliers in the aerospace industry, presented by Mr. Michael Santo on the Bodensee Aerospace Meeting (BAM) on 03/16/2021, the disposition of German suppliers to use M&A and Corporate Finance as strategic measures to overcome the crisis is discussed. (Source: Michael Santo, Managing Partner & Head of Aviation Practice H&Z, Munich, 03/16/2021, Impact of Covid-19 on the German Aerospace Industry - Status Quo and Strategies for Crisis Management).
What is remarkable about the survey results is that only 15 percent of respondents showed a need for equity financing. This can be explained by the fact that, at that time, many the companies were focusing on measures to secure liquidity.
The fact that state-owned aviation funds are the first choice of medium-sized suppliers to cover a potential need for equity is since they do not usually actively review business strategies and processes and realign them, if necessary, as financial investors do.
In the second position are strategic investors for equity financing, who provide not only capital but also additional know-how for growth and realignment. This explains their acceptance among medium-sized suppliers.
An important aspect of the study is that Financial Sponsors (such as private equity investors) have gained ground (42 percent) in the equity financing of the suppliers surveyed. If the proportion of respondents who would only accept private equity investors in an "extreme emergency" is added, the figure rises to a total of 63 percent. A shift in thinking has obviously taken place among suppliers in the aerospace industry.
According to the survey, acquisitions carried out to date and those planned do not play a significant role as a measure for the reorientation of suppliers (26 percent), because at the time of the survey the focus was on emergency measures to safeguard the company's existence. Only a minority of owners (17 percent) are considering a divestment of their own company to investors, either in full or in part. However, in the "post-covid" phase, the "New Normal", there will be an increasing willingness among suppliers to the aerospace industry to consider M&A instruments such as mergers, acquisitions and divestments.
In contrast, a majority of respondents (66 percent) were in favour of building partnerships as a way of addressing the crisis. The topic of partnerships has been an issue among suppliers in the aerospace industry for some time. However, successful alliances require binding contracts (e.g. joint venture contract, ARGE contract) between the cooperation partners.
So how can suppliers use M&A tools to respond to the Covid-crisis, critical market developments, instable supply chains and industrial vulnerability?
OEMs' requirements for their downstream supply chain illustrate the challenges faced by supplier companies. Airbus, for example, expects its suppliers to invest in their financial resilience and critical business scale. Both are expected to support the "re-ramp-up"(nationally as well as internationally), new technological challenges (such as climate-neutral flying), cost reductions and efficiency improvements through digitalization and automation.
Should an owner no longer be in a position to make future investments to ensure the competitiveness of his company, he should consider a succession plan, a disposal or partial disposal of his company. In the case of going concern, our recommendation is to think about "programmatically oriented" M&A activities as a component for the time after Covid. This refers to an M&A strategy in that a supplier company pursues several smaller "buy & build" or "bolt-on" acquisitions over a period of years, which in aggregate lead to a more significant market share. The opposite strategy to this is to go for a one-off "big bang deal". In a study published in April 2021, McKinsey showed that companies that regularly made smaller, targeted acquisitions generated excess returns with less volatility. (Source: Jens Giersberg, Jan Krause, Jeff Rudnicki, Andy West, McKinsey & Company, April 30, 2020, The power of through-cycle M&A).
The vaccination campaigns and government funds, such as Corona emergency aid and governmental short-time work, have helped to stabilize a large number of medium-sized supplier companies in the short run. In the "New Normal," however, owners and management are challenged to initiate strategic measures with medium- to long-term impact. In particular, this involves measures suitable for consolidating business units, building or expanding capabilities for digitization and automation, attracting top talent and qualified personnel to meet new technological challenges, and strengthening national and international competitive positions vis-à-vis the upstream supply chain. In addition, market players with access to finance and management capacity will enter the scene and force long overdue "Land Consolidation" in industries with fragmented supply chains.
This is already practiced by larger companies that have cross-cycle experience with instruments such as equity financing, private equity, M&A and joint ventures as strategic measures for reorientation. However, developments in recent years have made it necessary for smaller mid-sized suppliers to also deal with this issue.
SCS Supply Chain Support – A German Industry Expert Team
SCS Supply Chain Support – A German Industry Expert Team
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Deutsche Mittelstandsfinanz GmbH
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