Technological innovation and diversified supply sources drive supply chain

In a report released last November, business consulting firm Aon found that supply chain-related issues are the top concern for industrial and manufacturing companies: In its Global Risk Management Survey, sourcing issues were the number one risk facing respondents, while supply chain or delivery failures rose to second place from fourth place the previous year.

The pandemic-era supply chain crisis has taught organizations a tough lesson. With artificial intelligence and data analytics now a key focus for both enterprises and M&A dealmakers, industrial supply chain companies are looking closely at how new technologies can improve the way they do business. But it's the physical assets and solutions, from warehouses to machines, that are driving M&A in this space.

The evolving factory floor

Even after the pandemic, industrial organizations continue to struggle with supply chain inefficiencies and bottlenecks.

Industrial companies with short product lifecycles have been hit especially hard, said James Tannahill, president of Procamium Holdings, a private equity services firm that launched earlier this year. For aerospace companies fulfilling defense orders, the lifecycle from contract negotiation with a customer to execution can take years, giving them more wiggle room if a supply-chain problem occurs. But for companies that make biopharmaceuticals or chips, the shorter product lifecycles mean they have to pivot quickly, he said.

Tannahill says this need for agility means that automation technologies in manufacturing and inventory management will be key to the future of industrial supply chains. He says things have changed in the last 20 to 30 years. The factory floor has changed. To succeed in industrial, you need to embrace technology.

Things have changed in the last 20-30 years. The factory floor has changed. To succeed in the industrial sector, you need to embrace technology.

James Tannahill

Procamium Holdings

For many companies and investors, data-centric solutions that leverage advanced analytics and even artificial intelligence are expected to drive modernization inside and outside the factory. Experts agree that real-time visibility remains key to agility, and data has become exponentially more important for industrial businesses that need actionable insights.

That could mean accessing information about the status of goods being manufactured, raw material inventory levels, machinery maintenance and repair needs, supplier price changes, and even weather patterns that may affect the transportation of goods across borders.

“The disruption around supply chain, particularly as we look into 2021 and 2022, is really driving the adoption of supply chain analytics out of necessity,” said Gordon MacKay, managing director of logistics and supply chain at investment banking and consulting firm Capstone Partners.

The rise of AI but buyer beware

Mackay highlights the potential for AI to have a particularly big impact on predictive supply chain analytics solutions that can not only increase real-time visibility into key processes and risks, but also forecast factors that may impact those processes.

Mackay said companies with complex global supply chains that need to source a variety of raw materials, commodities and everyday items from around the world will benefit most from the technology, adding that AI's ability to bring together vast amounts of unstructured data will have the biggest impact on sourcing, fulfillment and risk management.

Mackay said that sectors that stand to benefit from AI, automation and other supply chain technologies are seeing the most investment in these tools, citing high-value commodities like semiconductor equipment, pharmaceuticals and other niches that require expensive equipment to manufacture, store and transport their products. He said the amount of investment and attention in this area has never been higher and is stronger than it has ever been.

But investors in AI solutions need to be cautious, he warns.

Talk to any supply chain manager at a manufacturing or logistics company and they'll tell you they're investing heavily, but that doesn't necessarily mean they're achieving what they set out to do, MacKay said.

With all the hype around AI, it's no wonder the market is flooded with solutions, with some products working better than others. For many investors, this is a problem, Tannahill points out. AI is a buzzword. It's easy to get excited. But some investors get excited without actually seeing a working product, he continues.

Smart acquirers (both strategic and private equity) need to consider whether their products meet regulatory requirements and can be modified to meet changing needs and regulations. This is what separates great investors from those with a big, long learning curve ahead, Tannahill adds. There is no one-size-fits-all AI solution, and if you come across one, run.

Physical solutions facilitate transactions

AI will undoubtedly continue to interest industrial companies and sponsors as we close out 2024 and enter 2025. In terms of M&A, organizations are focusing on acquiring physical assets and solutions rather than SaaS, which supports geographic and supplier diversification.

Alison Levasseur, partner at law firm Alston & Bird, said there is an increased desire to strengthen assets and relationships with various logistics and warehousing service providers, fulfilment centres etc across the country and ensure supplier diversification, adding that strategic and sponsored acquisitions can enable organisations to expand their resource base.

Alston & Bird recently advised packaging distributor and print solutions provider Veritive Inc. on its acquisition of contract packaging and fulfillment services solutions provider AmeriPack. In addition to expanding Veritive's offerings, Veritive CEO Sal Abbate said in a statement when the deal was announced that the transaction will expand the company's footprint in Texas and Pennsylvania and support its efforts to build a national platform.

In another packaging deal this year, Wynnchurch Capital-backed FCA Packaging Inc. acquired GreenTree Packaging & Lumber Co., a custom wood packaging manufacturer.

M&A in the warehousing industry is also on the rise due to growing demand for geographic diversification. A recent report by law firm White & Case, for example, highlighted increased deal activity in self-storage facilities, which have become a lifeline for private companies looking to store excess inventory amid ongoing supply chain disruptions. The sector saw two big deals last year: the $12 billion merger of Life Storage and Extra Space Storage, and Public Storage's $2.2 billion acquisition of Simply Storage. Meanwhile, private equity real estate firm Prime Group Holdings raised $2.5 billion last year for Prime Storage Fund III, which will focus on self-storage investments.

Down the Line

While AI may not yet be driving M&A deal volume, investors continue to turn to tech-enabled solutions in their investment strategies.

In the warehousing industry, for example, B2B software-focused private equity firm Nexa Equity announced a $31 million investment in warehouse and manufacturing labor analytics company Easy Metrics in May, and in April, One Equity Partners announced the acquisition of Ballymore Safety Products, a distributor and manufacturer of safety products that make it easier to move people and goods through warehouses and factories. Steve Lunau, a partner at OEP, said in the announcement that companies are increasingly looking for innovative technologies and solutions that keep workers safe and improve productivity.

This was also the year that GoExpedi, a procurement and supply chain management platform built for heavy manufacturing, secured $33 million in funding. Investors included hedge fund giant Tiger Global and private equity firms Cortes Capital and Labyrinth Capital Partners.

As AI-enabled solutions mature, investors will continue to prioritize tech-enabled services and products in their deal pipelines. Tanahir says mid-market and smaller companies will drive the volume of M&A, especially cross-border. There will also be domestic and foreign strategic acquirers, he says. Frankly, some of the more interesting action will come from strategic foreign players, especially in the Gulf.

Moreover, Levasseur said M&A activity is likely to pick up once the new normal for interest rates is accepted, adding that he does not expect the upcoming presidential election to have a major impact on the sector.

But there are things on the table that will impact the success of the deal: Offering some rollover equity as a means to close the deal and fill the valuation gap, incentivizing people to retain talent, investing in really good management teams — all of these things can help get a deal across the finish line, Levasseur says. “We think there's a lot of opportunity, especially in the mid-market,” she adds. “We're very optimistic.”

Carolyn Vallejo is ACG's Digital Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.

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