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.
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
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