M&A in manufacturing and engineering has felt the force of macroeconomic instability, but subsectors are generating steady deal flow at attractive multiples. Nicholas Neveling reports.
The manufacturing and engineering sector has faced challenges and has not been the easiest place to do deals in recent years. Inflation, rising interest rates, lingering post-COVID and Brexit supply bottlenecks, soaring wage costs and, more recently, the global trade tumult as a result of on/off US tariffs have taken a heavy toll on manufacturing and engineering companies. The FTSE 350 Industrial Engineering Index has shed around a third of its value since the beginning of 2022, while the UK Manufacturing Purchasing Index, which tracks manufacturing sector performance, has been on a downward trajectory since August 2024.
With key market indicators showing a sector under pressure, M&A activity in manufacturing and engineering is pretty flat. Figures compiled by Moore Kingston Smith recorded 2,704 transactions in the European manufacturing and distribution sector in the first half of 2025, just 2% higher than the 2,662 deals tracked in the second half of 2024. Activity varied significantly by region, with Scandinavia, Germany and the rest of Europe posting deal volume gains of 6%-10%, while the UK and Italy saw declines in activity of 6% and 15% respectively.
Patches of hope
Such tepid headline figures, however, do not tell the whole story. While the manufacturing sector has been a challenging one during the past 12 to 18 months, the reality is that within certain subsectors M&A activity has sustained a healthy clip, despite macroeconomic headwinds.
“There is a wide variance within the manufacturing sector when it comes to M&A, with appetite strong in some subsectors, but softer in others,” says KPMG partner Glynn Bellamy. “At the headline level it can look like manufacturing is at a challenging point in the cycle, but you really have to look at manufacturing subsectors to understand what is really going on.”
There is a wide variance in the sector – you have to look at the subsectors to see what’s going on
Robbie Gemmill, Deloitte M&A transaction services director, adds: “Advanced manufacturing and high-end engineering have generated steady M&A activity through the current cycle, but it has been difficult for lower-level manufacturers.”
This bifurcation of the manufacturing M&A market is reshaping how corporates dealmakers are approaching transactions in the space strategically, with deal rationales shifting from a focus on ramping up scale to accelerating technology and digital capability. Private equity investors, meanwhile, are actively seeking out opportunities to invest in R&D-led manufacturers in fast-growing industry verticals.
In the aerospace and defence subsector, for example, artificial intelligence (AI) applications and autonomous vehicle and machinery technology have spurred a flurry of M&A activity. FTSE 100 defence company BAE Systems, for example, acquired Malloy Aeronautics, a UK developer of heavy lift drones, to enhance its logistics product offering. Defence AI software company Helsing and drone manufacturer Tekever are among the European companies to receive strong financial backing from venture capital investors. Moore Kingston Smith figures show a 60% increase in European deals in the aerospace and defence sector in first six months of 2025.
“Strategic buyers are doing deals, but given the degree of macroeconomic uncertainty, are pivoting away from scale-changing, transformational deals and focusing on smaller deals that will enable them to differentiate from a technology point of view,” Bellamy says. “There is a real cross-over between traditional industrial manufacturing M&A and technology M&A. Manufacturers are ready to pay a premium for deals that will accelerate the tech-enablement of their businesses, so have been very active in backing early-stage businesses with interesting, manufacturing-aligned technology.”
Cross-border interest
At the end of January, US car parts business American Axle & Manufacturing agreed a £1.2bn take-private deal for UK counterpart Dowlais.
The deal was driven by the consolidation of automotive suppliers servicing petrol and diesel car manufacturers transitioning to electric vehicles, but is also illustrative of the attractiveness of UK manufacturing businesses to cross-border investors, particularly from the US, who have found manufacturer deal targets to be attractively priced relative to similar assets in their domestic market. With negotiations between the US and UK on trade tariff regimes now completed, more cross-border M&A from the US into the UK manufacturing sector is on the cards.
“A softer pound has supported a steady increase in cross-border investment in UK manufacturers, with US private equity firms and sovereign wealth funds investing actively in the UK manufacturing sector because they see great value for money,” says Deloitte M&A transaction services director Robbie Gemmill. “There is a strong pool of engineering talent and good IP in the UK.”
Shifting priorities
Investment in manufacturing-linked technology also reflects a longer-term business model shift in the sector, with companies evolving from pure play makers of products into service businesses.
The civil aerospace business of UK engineering giant Rolls-Royce, for example, now generates around two-thirds of its revenues from services. This represents a 180-degree shift from how the business generated earnings 30 to 40 years ago, with revenues driven by product and parts sales. Maintenance and servicing costs and risk were all carried by customers. Over time, however, Rolls-Royce has invested in building out its servicing capability to cover product care and maintenance through the entire lifecycle of the products, deepening relationships with customers and generating revenue after sale.
Digital and technology capability provide valuable tools to strengthen the servicing and maintenance divisions of manufacturers and engineers, with M&A a useful lever to accelerate technology expertise.
“Manufacturing companies are becoming more and more like service companies. They don’t only want to make and sell a product, but also find ways to get closer to customers and secure the aftermarket and servicing contracts,” Bellamy says. “Technology and software that can track product performance is becoming more and more important for manufacturers, and is reshaping how dealmakers think about M&A in the sector.”
Consolidation drivers
In addition to the tech-enabled manufacturing trend, deal activity has also been driven by consolidation and supply chain integration deal rationales. In response to higher operating costs and supply chain disruption, manufacturers have moved to make acquisitions that unlock synergies or facilitate the vertical integration of supply chains.
UPM Raflatac, a Finnish manufacturer of self-adhesive paper and film, for example, acquired UK-based Metamark, a maker of self-adhesive colour films and print films for large-format colour printing. UPM Raflatac said the deal would secure meaningful synergies and entrench UPM Raflatac’s position in the graphics-related manufacturing market.
Food manufacturer Greencore, meanwhile, made a £1.2bn bid for fellow food manufacturer Bakkavor to strengthen its supply chain and consolidate the private label food production sector, which has faced higher input and labour costs and narrower margins.
“Consolidation and supply chain integration have been key drivers for M&A in manufacturing. Supply chain integration deals have helped manufacturers to alleviate post-COVID bottlenecks and we expect these deals to continue as manufacturers make acquisitions to secure supply chains,” Deloitte’s Gemmill says.
Looking ahead to the rest of 2025 and into 2026, and the themes of tech-enablement, supply chain integration and synergies look set to remain the primary drivers of deal activity.
Even when investing behind these trends, however, dealmakers will be taking their time and proceeding with caution, particularly following the global trade shock sparked by unexpected US tariff announcements early in the second quarter of 2025.
“Tariff uncertainty is prolonging M&A processes involving manufacturers. Buyers are being pragmatic and waiting to see what happens as renegotiated trade deals come in, but they are taking a long-term view and continuing to work on deals,” Gemmill says. Businesses can take some reassurance that trade deals have now been agreed between the US and the UK and the US and the EU.
Tariff uncertainty is prolonging M&A processes involving manufacturers. Buyers are waiting to see what happens as renegotiated trade deals come in
Buyers are also remaining highly selective, with marginal deals unlikely to progress against the current backdrop. The good news for buy-side dealmakers, however, is that market dislocation has provided more clarity when it comes to identifying true market leaders.
“The recent period of high inflation has been a real stress test for manufacturers,” says Bellamy. “Those with a differentiated high quality product have been able to pass on higher supply chain costs without losing customers, and that makes them stand out from the crowd.”
Ready for take-off
In 2020 the Business Growth Fund and Octopus Ventures participated in a $24m funding round for UK-based space launch company Orbex.
At the time, no investor could have anticipated how important satellite launching capability would become from a commercial and defence perspective
In January this year, Orbex secured £20m direct investment from the British government in support of a Series D funding round, highlighting the strategic importance governments are placing on the development of satellite and rocket launching infrastructure and manufacturing.
The finance will support Orbex’s plans to make the UK a key hub for small satellite launches in Europe and enable the UK to launch British rockets, carrying UK satellites, from UK locations.
