Volume 16, Issue 6 - August/September 2015


What’s Moving the Market?
Big Deals, Bountiful Capital and Lots of ‘Prospects in Motion
by Michael Collins

The recovery is in full swing, and the health of the market is driving activity in a number of ways. One of those areas is mergers and acquisitions—although this has not taken place as strongly on the manufacturing side of this industry as on the distribution side. In April, Builders FirstSource announced its plan to acquire ProBuild. In June, Stock Building Supply and Building Materials Holding Corp. announced that they are merging. Then, at the end of July, it was announced that U.S. LBM had been bought by Kelso & Company.

The first two deals changed the landscape of the industry and raised numerous questions about areas where the newly formed companies both operate. For door and window manufacturers that sell to one company or the other, such mergers create opportunities to win additional business. These deals also bring the risk of losing business if purchases swing over to the vendor supplying the other merger partner. We recommend that companies serving distributors that are part of a merger be proactive in the days following the deal. Far better to call your customer and ask what you can do to win additional business as a result of a merger, rather than take your chances and wait to find out how things turn out.

Money in the Market

The ready availability of capital is another way the recovery is benefitting the market. Capital providers are still bullish on the building industry. Lenders are highly supportive of financing the debt needs of growing companies. Similarly, debt providers are solidly in the corner of buyers seeking to acquire building products companies. On the equity side of the balance sheet, support for deals is also very strong.

One measure of the health of the deal industry at any given time is the ease with which private equity (PE) funds are able to raise new capital. So far in 2015, lots of cash has been raised, arming those PE funds with dry powder to seek new deals. Interestingly, the recent trend among PE funds seeking fresh capital is the number that are hitting their so-called hard cap. That’s the maximum amount of money they are authorized to raise per their formation documents. One fund recently hit its hard cap of over a billion dollars after a three-month fundraising period, a virtually unheard-of speed.

Motion Creates Momentum

There are opportunities created by the recovery that come in the form of what sales trainers call “prospects in motion.” Prospects in motion are companies undergoing such significant changes in their business that they may be more willing than usual to make additional changes. For example, a company that has just entered a new territory, hired a new sales manager, built a new showroom or undertaken similar changes should be viewed as a company in motion. This means they would be more likely to consider taking on a new product or conducting a competitive product review. Many think they’d be less likely to do so because their plate is full and they’re digesting their recent changes. However, because they have already broken out of their natural inertia against change, such companies in motion can be great prospects for your new product line or products they haven’t purchased from you previously. Also, these types of changes are indicative of a company upgrading or overhauling its strategic plan. What better time to offer them another new path to growth?

Employees Need Incentives

Growth during a period of recovery is typically fast and furious. It is critical during such times to ensure that employees have the proper incentives.

In manufacturing, this typically means rewarding employees for operating for a certain length of time with no workplace injuries, for reducing scrap and other desirable behaviors. For employees in the sales area, incentives are even more critical. As a general rule, it is not a good idea to motivate employees based on total dollar of sales generated in a vacuum without anchoring the incentive to an additional performance number.

For example, you might choose to pay a zero commission on sales generated below a certain level of gross margin. You’d be surprised how quickly low-margin sales disappear when the sales force doesn’t receive any credit for them toward any revenue-related requirements.

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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