Volume 13, Issue 1 - January/February 2012


The Year Ahead
Will it be Happy?
by Michael Collins

The beginning of a New Year brings with it an urge to look back and to look ahead. When that time intersects with an election year, the urge is irresistible. The outcome of the elections this fall will undoubtedly hinge on the trajectory of the economy by that point in time and, in part, on who takes the blame for the continuing economic malaise. There are signs that conditions are gradually improving, though, both in the building products industry and the economy as a whole. The Fed’s decision to leave interest rate policy unchanged until 2013 is an important support for this industry. In any kind of recovery scenario, low-cost financing is critical.

In other positive economic news, consensus among economic analysts is that the U.S. economy will avoid a double dip recession. Home prices generally have stopped dropping but haven’t shifted to a recovery mode as of yet. This helps explain why lending standards have loosened and competition for consumer loans (even subprime) has increased—in every area except housing. However, Maury Harris, chief economist for UBS Securities, has issued a bullish outlook on housing. He feels that housing will once again drive the U.S. economy in 2012. The median economic growth prediction for 2012 and 2013 from a group of economists surveyed by Bloomberg was 2.2 and 2.5 percent, respectively. That would represent a return to solid growth for our beleaguered economy.

"After referring countless entry door buyers to other companies, many window manufacturers find that the practice begins to nag at their entrepreneurial spirit."

In the last several years, households have responded to the difficult conditions by making very difficult decisions regarding cutting expenses and increasing income. Likewise, companies have since used the cash generated from operations to reduce their average debt to equity ratio to 40 percent. Whenever possible, building products companies are undertaking the same debt-reduction strategy.

What’s Happening in the Industry?
As we enter the New Year, companies still are seeking to acquire growing companies and product lines. In a low-growth environment, an important way to grow is to acquire businesses that are smaller to the buyer but boast a stronger growth rate. Another inquiry we often receive comes from companies seeking to undertake a horizontal expansion. Such an expansion would involve launching or buying a company or product line that would give the company a broader presence in the marketplace. Examples would include a window company that explores the purchase of a door manufacturer. After referring countless entry door buyers to other companies, many window manufacturers find that the practice begins to nag at their entrepreneurial spirit. Owners find themselves wondering what it would take to capture that stream of business themselves.

Companies continue to rationalize their production assets. Examples of this include selective purchases of new equipment in order to phase out older lines. On a grand scale, it can involve closing an entire facility and routing its prior production to more efficient factories. This is good for the overall industry, since a factory that is more highly utilized is less likely to take on a low-margin business in order to capture volume and keep the plant more fully occupied. In addition to rationalization, companies have begun to make modest expansion plans. Any company successfully serving a niche product area is likely to find itself short of capacity to meet increases in demand. In other cases, lead times begin to be stretched, causing the company to lose bids they would otherwise have won. This represents a very inelegant solution to the problem of what to do when all productive capacity has been fully allocated.

A hybrid of the two previous strategies is also taking place. In this scenario, a company buys another company for the purpose of expansion. The twist is that the acquirer intends from the outset to fold the acquired company into its own production complex. These types of transactions can unlock significant value for the acquirer and allow them to increase the utilization of their existing facility.

Michael Collins, managing director, building products group, Jordan Knauff and Co., specializes in mergers and acquisitions in the door and window industry.


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