Geoff Ling | Managing Director
Updated: February 11th, 2025
Tariffs are a hot topic in boardrooms these days. Owners of US manufacturing and distribution businesses are asking two key questions:
1. How do tariffs affect M&A activity?
Investors always prefer a stable and predictable economic environment, so obviously uncertainty around tariffs is not helpful, especially when changes are announced at short notice, and the response of trading partners is unknowable. We expect US M&A activity to slow significantly this year in the industrials sector, as buyers take a wait-and-see stance.
2. How do tariffs affect valuations?
Established companies are generally valued on profitability, so the fundamental question is whether the company will be more or less profitable as a result of tariffs. There will be winners and losers.
The winners will be US companies with supply chains focused on domestic suppliers or suppliers in countries with preferential tariff rates, and customers primarily in the US (box 1 in the table above). They will be able to increase prices because their competitors will be less competitive, or exit the US market. From a valuation perspective, tariff-driven price increases have the benefit of enhancing revenue growth even if volume is flat (just like inflation caused by printing money), and investors will often extrapolate the growth trajectory in their valuation models without recognizing the transitional tariff effect.
However, for US companies with significant export sales (box 2), profit margins will suffer because non-US competitors will have an advantage in terms of material costs. Also, they run the risk of retaliatory tariffs.
Obviously, companies with supply chains focused on targeted countries (box 3) will suffer, especially if they serve export markets (box 4). Box 4 companies will be motivated to ship products from the targeted country suppliers directly to the export markets, bypassing US tariffs.
In the short term, box 3 and 4 companies are likely to incur additional costs in response to new tariffs:
They will take a hit by having to pay surprise tariffs before they are able to pass the incremental costs along to customers.
They will incur expenses shifting their supply chains to non-targeted countries.
We recommend that box 3 and 4 companies keep careful records of these transition costs if they plan to sell in the next four years. They are reasonable EBITDA “add-backs” that most buyers will understand.
Merrimack Group is a boutique investment bank specializing in industrial and STEM companies, with particular expertise in the lighting and fabrication industries.
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