Strategies for Success in 2010 and in
by Michael Collins
The majority of door and window manufacturers with whom
we’re in touch are cautiously but solidly optimistic that this is going
to be a better year than 2009. Such companies are undertaking various
plans, designed to leverage their existing assets and fill in any gaps
in the offering they bring to the market. In many cases these plans include
actively seeking acquisitions. As an example, virtually every private
equity fund that owns a door or window company is actively seeking to
acquire additional companies to “bolt on” to their existing holdings.
I met with several private equity investors at the International Builders’
Show. They confirmed that there were numerous private equity funds and
investment bankers prowling the show, looking for possible transactions.
All of this comes at a time when many companies are considering undertaking
a sale to take advantage of a return to profitability or to beat the increase
in the capital gains tax that will kick in at the end of this year.
Other companies are exploring the option of merging with another company.
Many companies operate from modern, efficient facilities created at a
time when the market was booming. Now, many of these manufacturers are
operating at chronically low volumes, in many cases below their breakeven
points. If a company’s revenues have dropped by 50 percent, it requires
a 100 percent increase in revenues in order to return to their original
level. Fearing that this may take too long to happen organically, many
companies explore acquiring a company similar in size to their own. To
the extent that the acquired company can shed its facility, the mere combination
of two complementary companies can snap them back to profitability through
better utilization of a single facility. Cross-selling becomes an added
Some companies are exploring other product areas to diversify their revenues.
These expansions typically are driven by the material from which the company’s
primary products are made. For example, wood window manufacturers are
likely to seek to apply their expertise in engineering wood solutions
by selling engineered flooring products. Vinyl window manufacturers may
pursue the addition of vinyl siding to their product offerings. In some
cases, companies considering this strategy add the product on a purely
distribution basis. Since manufacturers in these other product areas hunger
for additional volume, their prices may be compelling. Also, when companies
decide not to invest in a manufacturing facility for a new product area,
they maintain high flexibility to exit that product segment in the future
at very little cost.
We also are in touch with a handful of companies that find themselves
with a founder and part owner who wishes to retire. Executives at companies
operating with an owner who has one eye on retirement often report that
the company is not as nimble or daring as it once was. Typically, the
closer an owner comes to retirement, the lower their appetite for risk
becomes. This decrease in the appetite for risk can create very real challenges
in determining the appropriate future path for a company. To the extent
that such a company is profitable, it may be able to attract sufficient
equity capital to buy out all or a majority of the owner’s position. Minority
investments become more common, even by traditional buyout funds, because
these groups are constrained by financing. They often must contribute
equity that is not leveraged by any borrowed funds. In many cases, these
funds are willing to accept a minority position because they do not want
to write a check large enough to acquire all of a company’s equity. This
shift in ownership allows the remaining management team to pursue all
projects that would be accretive to the company’s long-term value, even
Still other companies are undertaking such tried and true methods as hiring
more sales professionals or retaining additional manufacturers’ representatives
in order to add dealers and increase geographic penetration. It is wise
for groups seeking to expand their distribution channels to reward their
sales teams only when they attract a credit-worthy dealer, rather than
any dealer willing to sign the agreement. Whatever the nature of a company’s
current plans, if they leverage its current strengths and mitigate its
weaknesses, the company will have the best possible chance to prosper
in the coming years.
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.
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