Volume 9, Issue 7 - July-August 2008

Making Acquisition

& Plant Expansion Decisions

In the current market environment, decisions regarding the location of a plant expansion or the desired geographic area in which to pursue acquisitions can be of critical importance to the future of a door or window company. Rising oil prices and consolidation among players in the industry have elevated these decisions to the highest level of strategic importance. Not only can such decisions increase a company’s service area greatly, they can lead to much needed savings on ingoing and outgoing freight charges, as well as materials costs. Our research in this area stems from having identified the fact that certain states across the country appear much more likely to be home to an acquired company than to a new plant expansion. In analyzing the plant expansion and transaction decisions made by U.S. door and window manufacturers between 2000 and 2007, we were better able to define this decision process. It appears that the locations chosen for new plant expansions or acquisitions of existing companies result from an imprecise alchemy that involves the prevailing business climate in a given state and factors specific to the company to be acquired. 

Our analysis began with a universe of 168 transactions and 99 plant expansions that took place between 2000 and 2007. In all of these events, at least one U.S.-based door or window manufacturer was involved. The database containing these transactions and expansions includes, among other data, the states in which plant expansions occur or in which companies are acquired. Since expansions and transactions can occur in a period that spans two calendar years, emphasis was placed on total transactions and expansions since 2000, ignoring the year in which they took place. According to our database, 43 of the 50 states experienced either a transaction or a plant expansion in the period under consideration. The states for which our database contained neither an expansion nor a transaction were Alaska, Maryland, Mississippi, Nevada, New Hampshire, South Dakota and Wyoming.

While there are a number of national business climate surveys published each year, we selected Chief Executive magazine’s “Best and Worst States for Business” survey, which was published in January 2008. The survey was completed by 605 top executives that ranked the states in which they operate on the basis of state government taxation and regulations, quality of the state’s workforce and the living environment in the state. Other factors included the availability of needed resources, education levels and the quality of the infrastructure in the state. These clearly are not the only factors that should be considered when selecting a state in which to do business, but they are sufficiently important to allow the survey to serve as a proxy for which states are the “right” states in which to do business. To confirm the predictive ability of the chosen survey, we analyzed the extent to which the ranking could predict the level of total activity in a given state (merger and acquisition transactions plus plant expansions). When listed in order of total transaction and plant expansion activity, 36 states fell within 20 slots of the ranking that would have been predicted by the survey. Delving deeper, 22 states fell within ten slots of their predicted rankings and sixteen states were within just five slots of the ranking predicted by their scores in the survey of chief executive officers.

Transactions and Expansions Analysis
Turning to transaction activity, the purchase or sale of all or a portion of a company, we found that roughly two-thirds of the 168 transactions that have taken place since 2000 have occurred in the top ten states for transaction activity. The chart on the top of page 37 summarizes the top states for transaction activity.

A review of the CEO survey rankings reveals that some 60 percent of the states in which the majority of merger and acquisition activity in the door and window industry has occurred are listed as being in the bottom half of states in the country with regard to their business climates. Clearly, these rankings may have changed somewhat over time, but we have assumed they were roughly constant through different periods in order to simplify this analysis. 

Turning to plant expansion activity, which is summarized in the chart below, it is clear that the business climates in states chosen for plant expansions are ranked more highly than in the case of acquisitions. Roughly two-thirds of the states in which nearly 80 percent of the plant expansions in this industry have occurred were listed in the top half of business climates, as compared to other states in the country. Five expansion-heavy states were in the top ten ranked business climates nationwide. This includes the ten states that were tied for tenth highest expansion level, at three expansions per state.

These charts represent the initial evidence that sites selected for plant expansions are more sensitive to the perceived business climate in a given state than are the decisions regarding whether to acquire a company in that state. Further evidence of that tendency was gathered by examining groups of the top-ranked states according to the CEO survey. It was determined that the top ten ranked states, or 20 percent of all states, produced 36 percent of the transactions and 40 percent of expansions since 2000. The top 25 states in the CEO survey, meanwhile, produced the expected 50 percent of transactions, while an outsized 60 percent of all expansions came from this top half of all states.

When the scope of the state by state analysis is narrowed further to include only the top five states with regard to transactions and the top five states for expansions, the tendency of transaction decisions to be less a function of the business climate than expansion decisions becomes even more clear. There were nine companies on the list of top ten transactions states that were also on the list of top ten expansions states. However, narrowing the list to the top five in each category eliminates the numerous companies tied for tenth place on the top ten expansions list. In viewing only the top five states in each category, we see that only Ohio is common to both lists. The chart on page 38 illustrates the sharp contrast between the CEO rankings of transaction-oriented states versus those more likely to host plant expansions. The median business climate ranking of the top five transactions states was 34th, versus a median ranking of fifth overall for the top five expansions states.

The final step in the process of confirming that the link between perceived business climate and expansion activity is stronger than that with transaction activity involved categorizing each state into one of three groups. The first, transaction-oriented, included states where more transactions than expansions occurred. The opposite situation existed in expansion-oriented states and neutral states were those where transactions equaled expansions or there was no transaction or expansion activity at all. In the 14 expansion-oriented states, the median CEO survey ranking was 20th among all states. The median transaction-oriented state, meanwhile, had a much lower ranking of 30th overall. 

Having determined that plant expansion decisions are driven primarily by the perceived business climate of a given area, it is worth considering the various factors that help determine the attractiveness of a given state for plant expansions. In order to confirm the best area for a plant expansion, companies must consider the cost of doing business, demographic factors, education levels in the area, government tax and regulatory policies, the existing infrastructure and the quality of the available workforce, among other factors. The chart on page 38 contains a summary of these various factors. Examples of this type of decision making may be seen in the high number of California-based companies that were acquired from 2000 to 2007 (13 companies). Meanwhile, only four plant expansions were undertaken in California. The data suggests that California’s rank as the 50th, or worst, state in which to operate a business leads companies wishing to serve that market to undertake plant expansions in nearby Arizona, for example, with five plant expansions. A similar example may be seen in the case of Florida and Georgia, where the former’s 18 transactions dwarf its meager four plant expansions. Nearby Georgia, meanwhile, saw only two companies acquired but enjoyed eight plant expansions during the period under consideration, tying it for first place in plant expansions around the country.

Application of this Research
The practical daily application of this research should take place when a company is considering organic growth by expanding facilities or building a new plant, versus growing by acquiring a company located elsewhere. A logical first step, regardless of which strategy is pursued, is to analyze the factors in the chart above to ensure that the general business climate of the area is conducive to new companies that wish to open a business there. The right state or municipality to serve as host for a plant expansion will work diligently to attract a new employer, typically offering valuable tax, zoning and other incentives. Given the loss of manufacturing jobs in this country in the last ten years, most municipalities have developed aggressive economic development efforts.

If the planned event is an acquisition, additional steps must be taken in analyzing the companies that are located in the area into which the company wishes to expand. While many acquisitions are primarily company-driven, the factors mentioned at the outset as drivers of consolidation may cause more companies to focus heavily on the geographic filter that is applied to acquisition candidates. After the initial business climate favorability has been determined, there are a number of factors that typically are considered by companies wishing to acquire other companies. Our research has shown that the most often mentioned of these is the desire to expand the product offerings of the buyer. Other reasons include gaining access to new market segments, expanding geographically and acquiring new technologies. Increasing market share and gaining access to the selling company’s distribution channels also are mentioned frequently. Companies that offer these characteristics likely will make attractive acquisition candidates. 


By rigorously applying these two levels of screening to plant expansion and/or acquisition opportunities, it is much more likely that a company’s efforts in this direction will result in success. 

Michael Collins is vice president of the building products group at Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. Mr. Collins’ opinions are solely his own and do not necessarily reflect the views of this magazine.


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