Adding It Up
A Recap of M&A Activity
by Michael Collins
We have found over the years that monitoring activity in the door and window industry in the areas of mergers and acquisitions (M&A) transactions, plant expansions, plant closures and business bankruptcies provides helpful insights into the health and direction of the industry. In order to capture the pace of the U.S. market, the data presented below include plant expansions and/or bankruptcies by a U.S. company or M&A transactions where the buyer, the seller or both are U.S. companies. Transactions include sales of entire companies or significant portions of a company, such as an entire product line. Additionally, if a company with five manufacturing plants goes bankrupt, that is counted as a bankruptcy but not as five plant closures. In this way, the plant closure data measure the desire of ongoing companies to increase or decrease their manufacturing capacity and are not distorted by business failure statistics.
Figure 1 illustrates M&A transactions in the door and window industry between 2000 and 2012, a period that saw 337 such transactions or about 26 per year. Of these, 75 percent were undertaken by companies already operating in the door and window industry, referred to as strategic buyers. The remaining 25 percent were undertaken by financial acquirers, typically private equity (PE) funds. Transactions by PE buyers tend to ebb and flow based on the perceived strength of the industry at any given time and the availability of debt to finance their acquisitions. Thus, 2004 and 2007 were strong years for PE buyers since the market seemed strong in those years and debt was plentiful. In recent years, PE buyers have waned because of the uncertain outlook for door and window manufacturers and the reticence of lenders to back acquisitions of building products companies. Anecdotal evidence suggests that the key industry data that are beginning to turn upward have attracted the attention of PE buyers once again. Dozens of such groups are enticed by the size of the industry and the fact that a sleeping giant is awakening, providing compelling opportunities.
Expansions and Closings
Figure 2 highlights the plant expansion and plant closure activity in the U.S. between 2006 and 2012. That period began with the opening of plants that were conceived and executed based on market strength that was fading by the time of the ribbon cutting. In the middle of that period, the uncertainty of the market drove huge numbers of plant closures, which have subsided in the last several years. Interestingly, we have tracked 85 plant expansions from 2006 to 2012. During the same period, we are aware of 86 plant closures. These plants were dispersed across the full size range, indicating that the industry managed to wring out as much plant capacity in the bust period as had been created in the boom.
The most notable aspect of the recent expansion activity is that in 2012, it finally began to increase again after bottoming in 2010 and 2011. The latter was somewhat of an echo year of the high number of closures in 2008 and 2009. Companies may have applied bandaids to problems in hopes that the recovery would solve the rest. When the recovery eluded us again that year, many threw in the towel and 2011 saw a little more than one closure per month. That trend reversed itself and, in 2012, there were only four manufacturing plants shuttered.
Closures and Bankruptcies
Outright business closures and bankruptcies soared in 2008, the first year that statistics about such events in the door and window industry were meaningful. As may be seen in Figure 3, some 18 companies closed or declared bankruptcy in 2008. Between 2008 and 2012, an eye popping 41 companies closed or went bankrupt, 30 of them in 2008 and 2009 alone. When an epidemic of business failures sets in, it is important to watch key underlying trends in order to spot the recovery.
In the case of business closures, the trend to watch is what happens to companies after they declare bankruptcy or close abruptly. In 2008 and 2009, 20 of the 30 companies that closed were liquidated at auction. This means those businesses were so fundamentally broken that the market placed a higher value on the separate pieces of equipment than on the ongoing entity, customer lists, goodwill, etc. In frank discussions with potential buyers of such businesses, it is very common for them to say that they feel they will end up with the troubled company’s customers through market competition. If they are correct in these situations, they are able to take over the business without the expense and risk of actually purchasing the company. If a competitor buys the distressed company, however, there is a strong chance that the buyer will end up retaining a meaningful portion of the customer base. Dealers will tend to stay with a buyer that honors all or part of the failed company’s warranties, regardless of whether they legally assumed this liability in the acquisition. The fact that buyers began to place a higher value on companies as an ongoing entities is illustrated in the sharp decline in the number of companies being liquidated. In 2012, all three companies that closed were purchased intact by a single buyer soon thereafter.
We would expect to see a continuation of the primary trends discussed above in 2013. Plant closures will likely remain at a very low level. Companies needing to expand after years of under investment will drive steady or increasing plant expansion numbers. Finally, many strategic buyers and private equity funds have indicated to us they are strongly seeking acquisitions of door, window and other building products manufacturers because they think the overall cycle is turning up. The prevailing atmosphere of growing earnings and continued availability of debt will intersect with pent up desire to sell on the part of owners who wanted to leave the industry three to five years ago. All of these factors should drive sales of door and window manufacturers in the year ahead. y
Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.
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