Part 2 – By Marvin K. Götz and Philip Herrmann
In the first part of this series, we took a brief look at recent M&A activity in the refrigeration and air conditioning industry and examined some of the latest highlights in more detail. Today, we want to focus on the industry-independent challenges of M&A deals in small and medium-sized enterprises, as well as the specific challenges facing the refrigeration and air conditioning industry.
Lack of experience in M&A
The majority of current M&A activity in the field of refrigeration, air conditioning, and ventilation technology targets small to medium-sized companies. This poses additional challenges in the process of corporate transactions. The majority of medium-sized companies have little or no experience with corporate transactions or have only come into contact with the subject in smaller asset and share deals. This lack of expertise means that, especially at the beginning of a project, expectations of the process and the capacities made available conflict with the actual course of events. Shareholders often have a strong emotional attachment to their business and tend to develop unrealistic ideas about its potential value. Potential is sometimes overestimated and risks are downplayed or even completely ignored.
Personnel dependencies
One of the most common challenges for buyers is the company’s dependence on its shareholders. In medium-sized companies in particular, shareholders often play a key role in the management of the company, are heavily involved in its operations, and maintain relationships with key network partners, suppliers, and customers. A significant part of the company’s value proposition is therefore tied to the role of the shareholders. To counter this, there are various solution models, such as a temporary transition period for the former shareholder to train new management and ensure a smooth handover of essential know-how. The increased involvement of a second management level in the transaction and handover process can also become more important as a result.
The importance of corporate strategy
Another important aspect is the corporate strategy (of both parties). If the long-term corporate strategy is insufficiently developed, this complicates the search for suitable targets for further growth or the (un)planned sale of the company, as well as the subsequent integration process. In order to find a suitable target, the company should agree in advance on what the future growth path should look like. Which markets do you want to enter? What services do you want to offer in the future? What know-how and skills are needed to meet future challenges? Without a clear strategic direction, there is a risk of early failure of a planned transaction or, in the worst case, medium-term overload of the company itself. To overcome this challenge, in addition to the indispensable legal advice, it is important to consult further expertise on suitable company valuation, management of the overall process, and possible subsequent integration, and to critically examine your own strategy in advance.
Customer concentration and project structure
In addition to the challenges outlined above for small and medium-sized enterprises, there are other important aspects to consider, particularly in the refrigeration and air conditioning industry. These industry-specific challenges require a deeper understanding of the market and the individual companies involved. This applies both to M&A activities between market participants and to other investors. Business, which is often conducted locally or supraregionally, is in some cases heavily dependent on the existing customer and project structure. Large, complex orders could overwhelm management and project leaders if they lack sufficient control and experience. A small number of large customers lead to a disadvantageous dependence on the development of a few players and can also put the company itself in a difficult position in the event of unforeseen crises or market disruption. The order structure also provides insight into potential risks. A large number of recurring orders in the area of maintenance and other services are much more reliable to plan than one-off project orders that occur at irregular intervals. In order to become aware of the risks and opportunities of this aspect, a detailed analysis of the business model and ecosystem is necessary in order to then evaluate the impact on the company valuation.
The challenge of skilled labor shortages
Another factor is the industry-wide shortage of skilled workers, which, alongside customer structure, can have a significant impact on a company’s success. As in many other industries, the appeal of apprenticeship professions, such as mechatronics engineer, is declining sharply. However, companies must not only strive to attract young employees, but also to retain those who are well trained. Often, the main reasons for a transaction in this industry are not only to open up new markets and strengthen the customer base, but also to specifically acquire experienced as well as young and well-trained skilled workers. Therefore, a close look should also be taken at the employee structure. How old are the employees? How long have the respective employees been with the company? What training have they received? Even after the transaction, it is important to address the needs and fears of employees and prevent increased turnover. To this end, cultural differences should be taken into account and a clear integration strategy should be developed to ensure that as few employees as possible are overwhelmed by the changes.
i-capital – Your expert for M&A
Of course, this article only offers a brief insight into the various challenges that companies face before, during, and after a transaction. Other aspects such as increasing environmental regulations, greater political influence, financing a company acquisition, managing the process alongside day-to-day operations, and other general risks during a transaction can also determine the success or failure of an M&A activity. We recommend approaching this topic in a structured manner and evaluating key challenges at the beginning of the process, ideally with external support.
Your contact:
Philip Herrmann – Partner
+49 151 14 33 96 02
