Volume 11, Issue 2 - March 2010

Trend Tracker

Strategies for Success in 2010 and in the Long-Term
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 bonus.

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 riskier ones.

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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