Going into overseas ownership – A good move?

Dieter Adam – 8 November 2023

We recently saw the news of the impending sale of another major Canterbury manufacturing group, MHM Automation, to an overseas (US-based) company, Bettcher Industries, Inc.

Fun facts: (1) Bettcher Industries itself is about the same size as MHM Automation by number of employees, but including its subsidiaries, is said to employ more than 3,000 people globally; and (2) Bettcher on their website still call themselves “An employee-owned company with 300 employee-owners”, but in-fact sold the majority of its shares to a private-equity firm in 2017 and has been owned 100% by KKR since 2021. Among members of the MHM Group is WYMA Engineering (NZ) Ltd., who have been very successful recently and moved into new premises earlier this year.

There have been many of these transactions before, of course – more recently the sale of ENATEL to IDEAL Industries, Inc. in 2018, and Aucom to UNICO Technologies Group in 2019, for example. The usual ‘public response’ to such news tends to be negative. The perception is that something is ‘being taken away from New Zealand’. When we look at the motives of the purchaser as stated publicly, these are companies that had developed products with a highly competitive position in global markets and a good fit within the portfolio of the purchaser. As for the motives of the sellers, we can only guess, but a rational assessment may well have been that while these companies have been on a successful growth trajectory, a further pursuit of that trajectory would have required access to resources – financial and otherwise -beyond the means of the original private owners.

The fate of local manufacturers, once they have been acquired or owned for a while by larger overseas companies, is patchy – we all remember the demise of the local manufacturing operations of General Cable, Schneider Electric, and Gelita in the last few years. Others survive and thrive. The pattern seems to be that where products made by the local company follow the SME secret to success of playing a significant or dominant role globally in a highly specialised niche, operations will continue and grow. Especially where the purchase was made in the pursuit of ‘portfolio fit’. The manufacturing of generic products also made elsewhere in the acquiring company will only continue if genuine advantages to making these products locally exist and persist.

Things can and do go the other way as well, of course. When TE Connectivity pulled out, Argus Group took over, and signs are promising that succession to be highly successful. And the Christchurch Engine Centre is one of several similar Pratt & Whitney operations globally. They continue to be successful against some odds (geographically remote) – presumably because they are really good at what they are doing.

Mergers and acquisitions are, of course, part of the normal lifecycle of manufacturing companies. The fact that, in New Zealand, the buyer is usually an overseas company is simply due to the fact that – at least for ‘portfolio fit’ purchases – there is no larger company in New Zealand where such a fit would exist.

From a sector perspective, there is no downside in the first instance. As long as operations continue, and especially if they grow faster than they would otherwise have, these companies will continue to provide jobs and source inputs from other local manufacturers. They can also continue to contribute to the collective intellectual capability and capacity that drives local progress in manufacturing technologies and processes and provide scale that attracts providers of input materials and services.

From a macro-economic – NZ, Inc. – perspective, the picture is a bit more granular: PAYE tax payments will continue to be made, as will – in principle – taxes on profits. Companies operating in several jurisdictions do, however, have a wider range of options available when it comes to managing their tax obligations. Beyond that, the part of NPAT not re-invested is free to leave the country and thus likely to have an impact on New Zealand financial position internationally. That position has not been looking good recently, and it is not favourable by international comparison:

Now, to be clear – repatriated profits from New Zealand-based manufacturing operations will in each case be but a miniscule contributor to what clearly is a challenge to the country. The question is – should every little bit count …?