Mergers and Acquisitions
2010 Is Slower Year Than Expected
by Michael Collins
At the end of 2009, we predicted that merger and acquisition (M&A)
activity in the door and window industry would continue in 2010 at roughly
the same pace as seen in 2009. That has turned out not to be the case,
and it is interesting to examine the reasons. As shown in the graph at
right, 2008 saw some 31 acquisitions completed, which was nearly equaled
by the 29 transactions in 2009. With only five acquisitions of which we
are aware so far in 2010, the pace of M&A activity has slowed drastically.
Reasons for the Decrease
There are numerous factors that have contributed to the decrease in M&A
activity thus far in 2010. Up until recently, financing has been very
difficult to obtain. When private equity (PE) funds and companies are
unable to borrow a portion of the cost, they are less likely to complete
acquisitions. Another reason for the slowdown stems from a trend that
is, in itself, positive for the industry. A number of the sales conducted
in 2009 involved companies that, in a stable market, would not have been
for sale in the first place. Thus, as the market has improved and companies
have started to stabilize, there are fewer sales driven by the necessity
of a lack of financing. Another offshoot of this trend that has had a
dampening effect on sales of companies is a gap that existed between the
prices buyers have been willing to pay for companies and the owners’ beliefs
regarding the fundamental value of their companies. Owners did not wish
to sell at a price that would fail to capture the long-term value of their
companies, simply because they were selling on a downstroke. This misalignment
of the supply and demand curves causes the number of transactions to drop.
Another key factor that we believed would drive sales of door and window
manufacturers in 2010 was the pending increase in the capital gains tax.
With capital gains taxes now at 15 percent, and likely to increase to
25 or 30 percent when the current tax rate expires on December 31, 2010,
we believed that a slight “rush to the door” would be created in the industry.
However, with earnings down, many companies have instead focused on making
improvements in their level of earnings before interest, taxes, depreciation
and amortization (EBITDA), a proxy for cash flow. This strategy can be
beneficial, even under a modest increase in revenues and EBITDA. This
even can be true when the EBITDA margin (EBITDA divided by revenues) and
the EBITDA multiple used in determining valuation both remain the same.
Needless to say, the planning surrounding a business sale should involve
one’s tax and legal advisors.
With some hesitation on the heels of having predicted a stream of door
and window manufacturer sales in 2010 that haven’t materialized, we continue
to believe that M&A activity in the industry will be strong in the
next 12 to 18 months. The profitability of companies slowly is increasing
as the market stabilizes. Companies have downsized and cut costs to the
point where even a modest increase in sales can result in a strong increase
in profitability. These extra profits not only make a case for the higher
valuations that selling business owners desire, they provide additional
operating profits that buyers can use to fund acquisitions. This, combined
with a sharp increase recently in the availability of loans, fuels the
buying appetite of strategic acquirers. PE buyers, for their part, are
holding or raising billions of dollars that must be put to work in acquisitions.
Dozens of additional such funds have approached us in recent months, professing
their desire to invest in building products manufacturers. Thus, the pace
of M&A activity in the remainder of 2010 and in 2011 should strengthen
and will serve as an important indicator of the market’s belief in the
recovery of this segment.
Michael Collins is vice president of the building products group
at Jordan, Knauff & Company. His opinions are solely his own and not
necessarily those of this magazine.
© Copyright 2010 Key Communications Inc. All rights reserved.
No reproduction of any type without expressed written permission.