Current State of M&A: PCB/EMS

Current State of M&A: PCB/EMS

The printed circuit board (PCB) and electronics manufacturing services (EMS) industries have been the focus of many M&A transactions this year. Activity is being driven by various factors including uncertainty over the proposed capital gains tax, volatility brought on by the COVID-19 pandemic, and an aging workforce that have their sights set on retirement. 

However, the industry is healthy overall. Since 2016, annual revenue for circuit board and electronic component manufacturing has increased—1.4 percent in 2021 alone. Projections show continued growth through 2026. 

This could be the time for many private owners of PCB and EMS companies to plan their exit strategy, or for companies looking to grow through acquisition to strike while the iron is hot. These are a few of the trends we’ve been seeing this year. 

A Rise in Onshoring 

Over the years, offshoring activity has led to lower domestic production. Countries like China and Mexico attract manufacturers with lower labor costs and appealing tax incentives. 

However, this historical trend has recently backshifted. After the pandemic disrupted the global supply chain, creating serious product shortages, many PCB and EMS companies have seen an increase in domestic demand. 

Opportunities are ripe for those companies with expansive facilities and the capacity to take on manufacturing. Long-runs that were once more cost effective to offshore may now be produced closer to home. 

Chip Shortages 

The global chip shortage is still creating aftershocks across industries, from electronics to auto manufacturing. This has created a backlog of orders for PCB and EMS companies that rely on these chips. 

But the order backlog also puts companies considering a transfer of ownership in a favorable position. As of June 2021, the industry book-to-bill ratio held steady 1.48. Despite supply constraints and limited parts availability, EMS bookings rose 61.3 percent year-over-year and 43.8 percent from May. 

These numbers are a welcome sight on the buy-side and on the sell-side. 

Growth in the Medical Sector 

Over the years, the industry has seen massive demand from healthcare. Manufacturers in the medical device market are scrambling to stay ahead of innovation, as devices (and their electrical components) become smaller and more lightweight. The digital health market is expected to grow in value from $5 billion to more than $90 billion by 2025. As a result, healthcare companies have become valuable clientele. 

From a regulatory standpoint, there are even more opportunities. Tax policy, tariffs and new trade agreements have thrown a wrench in offshore medical device design and production. This has begun paving the way for US-based PCB and EMS companies to take the lion’s share of the business. 

Low-Margin Work 

Historically margins have been thin for PCB and EMS companies. Since manufacturers also have no intellectual property to claim, customer relationships are key. 

Take auto manufacturing, for example. Many PCB/EMS companies do prototyping work for small companies with new products, investing in these relationships with the hope of continuing to get orders. However, when a product takes off, long-runs are often produced off-shore due to cost efficiencies. The investment they’ve made in the relationship is lost. 

The companies with the facilities and equipment will prosper. And the PCB and EMS companies with long-term relationships already in place will have an ace in the hole. 

Preference for Sub-$50M Revenue Companies 

In this market, size does matter. PCB and EMS companies generating less than $50 million in revenue are in a tough position. They aren’t getting the attention they need from larger companies, which means the pool of buyers is smaller and more complex. 

The Verdict: Cost Control is Critical 

Success for PCB and EMS companies centers on cost control. Operators will need to invest in newer, faster equipment. But equipment isn’t cheap, and a company must be well capitalized to invest. This is already a struggle when margins are thin. 

There’s a strong case for industry consolidation. And it’s a good idea to prepare for an acquisition ahead of time. The businesses planning and investing in new equipment, certifications, people and systems will dominate the industry. 

We recommend having a conversation with an M&A professional to explore your options and determine what you need to do to get your business in order in case an unexpected offer comes to the table. 

Schedule a discovery call with our advisory team—let’s talk about how you can use these trends to your advantage. REAG has a wealth of experience in the PCB and EMS industries to steer you along the way.