The 2020 U.S.-China trade agreement helped spark renewed interest in gear and power transmission manufacturers, with private equity and strategic buyers increasing acquisition activity across the sector.
China Trade Deal Drives Interest in Gear and Power Transmission Manufacturing M&A
A Phase One trade agreement signed between the United States and China on January 15, 2020, included Beijing’s pledge to increase purchases of U.S. goods and services, including metallurgical coal and other energy products.
Under the agreement, China planned to increase imports of U.S. energy sources, including liquefied natural gas, crude oil, refined products, and coal, including metallurgical coal, by $18.5 billion in 2020 and $33.9 billion in 2021.
This was part of the broader trade agreement in which China committed to purchasing approximately $200 billion in additional U.S. goods and services over the following two years.
Although there was still much to be worked out, the pledge was viewed as a positive sign for manufacturers serving the energy industry—including gear manufacturers and companies producing power transmission components.
Private Equity Interest in Gear Manufacturing Increased Sharply
Following the announcement of Phase One of the China trade deal, we saw a sharp increase in inquiries from private equity firms regarding gear manufacturing and power transmission component companies that were either on the market or expected to come to market during 2020 and 2021.
Inquiries increased 450% in the two weeks following the announcement of Phase One of the China trade deal, according to Frances Brunelle, founder of Accelerated Manufacturing Brokers, Inc., a company specializing in the sale of lower-middle-market manufacturing companies nationally.
The increase demonstrated just how quickly changes in trade policy and expectations for industrial demand could influence acquisition interest within highly specialized manufacturing sectors.
2019 Saw Strong M&A Activity in the Gear and Power Transmission Sector
Despite the approach of an election year, 2019 saw robust acquisition activity in the power transmission and gear manufacturing space.
Several transactions demonstrated continued strategic interest in specialized gear manufacturing, industrial equipment, repair services, and related power transmission businesses.
Notable 2019 Gear and Power Transmission Transactions
- On February 26, 2019, Gleason Corporation announced the signing of a definitive agreement with Daetwyler Industries AG and MDC Max Daetwyler AG to acquire all assets of Daetwyler’s Faessler gear honing business. Gleason is a global leader in gear technology solutions with manufacturing operations in the United States, Brazil, Germany, Switzerland, India, China, and Japan.
- On June 25, 2019, Ohio Transmission Corporation (OTC), an industrial equipment service provider and distributor headquartered in Columbus, Ohio, announced the acquisition of Furey Filter & Pump and its subsidiary, PSI Engineering. Together, the two companies employed approximately 65 people in Wisconsin and Minnesota.
- In October 2019, P&F Industries, Inc. (NASDAQ: PFIN) announced that, through a wholly owned subsidiary of Hy-Tech Machine, Inc., it had acquired substantially all the assets of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc. Both Illinois-based companies manufactured and distributed custom gears and power transmission gear products.
- On December 19, 2019, Sumitomo Machinery Corp. of America (SMA), one of the nation’s leading industrial gearbox manufacturers, announced the acquisition of LUFTEX GEARS, Manufacturing & Services, headquartered in Lufkin, Texas.
Together, these transactions illustrated the continued value strategic buyers placed on specialized manufacturing capabilities, established customer relationships, technical expertise, and companies serving the broader power transmission market.
Gear Manufacturing M&A Continued Into 2020
The momentum did not stop with the end of 2019.
Power transmission and gear manufacturing M&A was already off to an active start in early 2020, with both strategic acquisitions and new manufacturing businesses coming to market.
Early 2020 M&A Activity
- On January 30, 2020, Ohio Transmission Corporation announced the acquisition of Laron Inc., a leading service provider of mechanical and electric motor repair and engineering services in the southwestern United States.
- Accelerated Manufacturing Brokers, Inc. announced the exclusive listing of a Mid-Atlantic-based power transmission component manufacturer serving as both a Tier I and Tier II supplier to a variety of industries. At the time, the company reported gross margins in excess of 50% and net margins of approximately 33%. It had also made a sizable investment in upgraded equipment and was operating at only about 30% capacity, providing significant room for future growth. To learn more about this opportunity, access the NDA here.
Why Specialized Manufacturing Companies Attract Buyers
The activity occurring within the gear and power transmission sector at the time reflected a larger trend we frequently see in manufacturing M&A.
Buyers are often attracted to companies that possess difficult-to-replicate capabilities.
That can include:
- Specialized equipment
- Skilled employees
- Engineering knowledge
- Long-standing customer relationships
- Attractive margins
- Available production capacity
- Tier I or Tier II supplier relationships
- Exposure to multiple end markets
For strategic buyers, acquiring an established manufacturer can provide capabilities, customers, and capacity much faster than trying to build those resources organically.
For private equity buyers, a strong manufacturing company can also serve as a platform for additional acquisitions and future growth.
Changes in Industrial Markets Can Quickly Affect M&A Demand
One of the important lessons from this period was how quickly changes in trade policy, energy demand, and broader industrial conditions could influence interest from buyers.
A policy announcement that appeared to create additional demand for U.S. energy products also generated increased interest in manufacturers that served industries expected to benefit from that demand.
That is why manufacturing business owners considering a future sale should pay attention not only to the performance of their own companies, but also to the trends occurring in the industries they serve.
Sometimes the best time to explore a sale is when buyers are actively looking for exactly what your company does.