Engineering businesses - putting a premium on people

Even for those who do not already have a firm footing in the sector, engineering businesses are becoming an increasingly attractive acquisition prospect. There are clear signs of life emerging from the once-stagnant industry, and companies that have the skilled workforce to capitalise on the returning demand are proving to be highly sought after from external investors keen on inorganic growth.

There was a time, not so long ago, when the UK’s engineering industry seemed to be on its last legs – in a similar way to manufacturing companies, businesses were struggling to keep pace with foreign competition.

For SMEs it has been particularly difficult to compete in an increasingly global marketplace, especially during the recession. Banks did not help the matter either, with many reluctant to back small players facing fierce foreign competition, high operational costs and requiring constant investment.

Yet while the investment opportunities may not have been that attractive, this is starting to change. The UK’s small engineering businesses are demonstrating positive signs of growth, which is being reflected in the performance of the sector as a whole. This in turn is transforming engineering businesses into attractive acquisition targets.

Take the Luton-based firm Hayward Tyler for example – based on its shares, the business has witnessed growth of almost three times over the past 12 months. The company, which makes electric motors and pumps for the oil and gas and nuclear industries, revealed that in the year to 31 March 2014 its revenues increased by a third to £43.2 million, with earnings per share up 120 per cent.

In Yorkshire, meanwhile, 600 Group is also seeing a change in fortunes. Between 2010 and 2012 it experienced hard times after an attempted expansion into Eastern Europe failed on a Napoleonic scale. However, the machine tool maker says that shares are up a third since the end of March.

Across the Pennines, the Manchester business Renold, a maker of chains and couplings, has reported a doubling in turnover in the past year. There are plenty of others too, but the point here is not to collate every piece of positive news about UK engineering firms; the point is to illustrate the improving climate that is clearly enabling growth among these companies, as well as the growing attractiveness of these businesses as acquisition targets.

At the heart of this, of course, is the returning health of the national and global economy; as consumer spending rises, the cogs of the production line begin to turn once more and engineering firms, like manufacturers, have been among the first to see the benefits of this. But consumer activity is not the only influence; investment from the public sector has also played an important role.

The government has actively shown its support for the sector, particularly through grants from the Technology Strategy Board. Indeed, as part of the Aerospace Growth Partnership (AGP), last year the government announced £2 billion of funding to boost engineering jobs and create the UK Aerospace Technology Institute.

The government clearly sees that there are financial benefits to be had from the sector, which is not surprising when you consider how central manufacturing and engineering have traditionally been to Britain’s GDP. And so, with SMEs announcing a reversal in fortunes and the public sector eager to stimulate growth further, now is clearly a good time to consider an acquisition in this space.

Investment groups are already paving the way in this market. CorpAcq, for example, celebrated its 10th acquisition in August this year when it took over the precision engineering business Olympus Engineering – and its 160-strong workforce – for an undisclosed sum.

Also in August, Leeds-based Renew, an engineering services group supporting UK infrastructure, acquired Forefront Group Ltd, a specialist engineering business focused in the gas infrastructure market. Forefront employs roughly 350 skilled personnel and has become an established name when it comes to the replacement of gas mains. Although revenue fell in the year to 28 March 2014, the company’s “leading industry reputation” and talented workforce were cited as major influences in the acquisition by Renew chairman Roy Harrison.

Indeed, a critical part of both deals was, in fact, the workforce itself. In many respects, when it comes to acquiring an engineering business, a skilled set of staff can prove as valuable as physical assets or intellectual property. And this makes sense – a study by the Institute of Engineering and Technology has found that 76 per cent of employers have reported problems with recruiting senior engineers with five to 10 years’ experience – this is up from 48 per cent in 2011. As a result there is a premium being placed on talent in what is a highly skilled industry.

To highlight the real scale of the problem, according to industry body Engineering UK, Britain needs to train 87,000 engineering graduates a year – double the previous rate – until 2020. Cheaper university fees, further funding and apprenticeships have all been touted as potential solutions, but only time will tell what action the government and industry takes to address the issue.

For the time being, this shortfall in skilled and experienced workers illustrates the added value of staff that comes as part of a business acquisition. With the industry picking up and the government supporting the growth through such things as the aforementioned AGP, it is likely that some of this demand will be met, but the need for an experienced workforce will remain a key consideration when weighing up buying an engineering firm.

Ultimately, with organic growth potentially being hampered by a shallow talent pool, the engineering sector more than most represents an ideal area for inorganic growth. As activity picks up, as automotive and aerospace engineering bustles back into life, there are sizable gains to be made in the industry; this all points to one thing – snapping up an engineering firm with a quality product and skilled employees to produce it is an attractive opportunity well worth exploring.

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