Private Equity Interest Rises
The Implications for Door and Window Companies  
by Michael Collins

While the number of acquisitions of door and window companies by private equity funds peaked in 2004, the interest of the private equity community in making acquisitions in the door and window space continues to be strong. Our transaction database has recorded nearly 50 door and window company acquisitions by private equity groups between 2000 and year-end 2007. We are in touch with roughly 100 private equity funds that either have an investment in this industry or are actively seeking to make one. While some private equity funds are intimidated by the current downturn in the housing market, there are a great many with a sufficiently long-term view to know that now is the time to buy companies in this industry.

What Makes Companies Enticing 
Private equity funds are attracted to the door and window industry for several reasons. Well-managed door and window companies generate healthy cash flow margins of 15 to 20 percent and usually require relative modest levels of capital expenditures. While our research has confirmed that door and window companies face a growing threat from overseas competition, this industry will weather that competition to an extent that would be envied by most manufacturing industries.

There are a number of implications of private equity acquisition activity. We would expect an increasing emphasis by private equity-owned companies on sourcing components from overseas. Many owners report that they do not source every possible component overseas because of long-standing relationships with U.S.-based suppliers. Private equity funds typically will take a clean slate approach to sourcing in order to secure the most economical components, driving returns for their limited partners. 

Another important aspect of being acquired by a private equity fund is the enhanced access to capital that it provides the acquired company. Since most private equity funds face the issue of deploying large amounts of capital, they prefer to acquire companies that will need additional capital in the future. As an example, we are contacted frequently by private equity funds that have made an acquisition recently in this industry and are now seeking additional or “add-on” acquisitions. Each acquisition of a door or window company by a private equity fund often creates an appetite to complete another one to four acquisitions over the next three to five years. This increased buying pressure benefits owners who will seek to sell their companies in the coming years. 

From the perspective of the private equity funds, combining companies in the same industry offers the opportunity for significant investment returns. Some of these returns come from the additional cash flow generated when costs for duplicated systems and personnel between the two companies are eliminated. 

Another source of value in combining multiple companies comes from selling the companies at a higher combined cash flow multiple than the multiple at which they were purchased. For example, three $2-million cash flow companies bought at a multiple of five times cash flow would represent a $30-million investment (three companies multiplied by $2 million multiplied by 5). Those companies could be consolidated into one company with $6 million in cash flow that might sell for six times cash flow, or $36 million. 

What Private Equity Funds Bring to the Table
Other things being equal, private equity funds also seek to acquire companies that, in addition to a change of ownership, require capital to complete a specific initiative that will make the company more competitive and valuable. Examples of these would include combining several outdated facilities into a single modern, highly efficient plant. Such an investment can drop savings to the bottom line as additional cash flow, increasing the value of a private equity fund’s investment in the company. 

Another area in which private equity funds have an impact is the use of professional management techniques. These include lean manufacturing and various other programs designed to increase efficiency and quality. Most companies acquired by private equity funds find that their new owners require a more detailed set of financial reports on a monthly basis than the company was accustomed to preparing under its former management. Most private equity funds have a specific set of ratios and financial presentations on which they focus in all of their portfolio companies. Implementing these additional management methods and controls usually results in higher quality and lower expenses.

The consolidation being driven by private equity and strategic buyers alike changes the competitive landscape in the door and window industry. Companies that do not choose to partner with an acquirer must implement the same types of programs and secure access to similar sources of capital in order to remain competitive. 

Michael Collins is with 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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