Mergers take a breather
After maintaining a frantic pace, merger and acquisition activity has slowed
By John R. Johnson -- Industrial Distribution, 12/1/1999
Newton, Mass.--Eric Holloway picked a good time to sell his business. When Holloway, former owner of Holloway Brothers Tools, inked his deal with MSC Industrial Supply in March of 1998, market valuations were peaking for industrial distributors. In nearly two years since the deal, values have come down and merger activity has lessened dramatically.Why the drop off? There are several theories. The slowdown in the manufacturing sector, brought on in part by the Asian crisis two summers ago, hurt distributors more than initially expected. With sales slumping as a result, the stock prices of many publicly traded distributors went south, where they have remained most of the year. And, unless they are blessed with lots of cash, low stock prices make it difficult for public companies to acquire.
A slower manufacturing economy equates to lower earnings for many distributors who are seeking to be purchased. Many are simply waiting for their earnings to improve before they put themselves back on the market. Others haven't been willing to come down much on their asking price.
Holloway hit it just right. Holloway Brothers was coming off a record month in March of 1998. Thirty days later, there were signs that the Asian crisis was going to have a serious impact on the economy, and the values of distributorships began to sink.
Adam Fein, principal at Pembroke Consulting, says that's one reason for the slowdown in merger activity.
"With a general slowdown in the industrial business, it may be that now is not the time to sell. If you're paid for the previous 12 month's earnings, and those don't look so good right now, [owners] want to hang on," said Fein, whose firm tracks merger activity in several industries. "And since rollups are having problems, a number of buyers have dropped out, so there is less of a bidding war going on and prices are coming back to normal. But people's memories are still of the bidding wars two years ago."
Jack Healey, chief financial officer at Industrial Distribution Group, said that is definitely true. After acquiring 17 firms in 1998, IDG bought just two in 1999.
"I don't know if it was so much our stock price or that the folks we were looking at buying didn't realize that the market forces [affecting us and other distributors] were also affecting their businesses," he said. "There are still potential prospects out there, but their sales are down, and prices weren't coming down. I think the market was overpriced."
It's easy to see the decline in action when you look at the numbers of acquirers like IDG and MSC Industrial. Numbers presented by Pembroke Consulting also offer evidence. In 1998, for example, there were a total of 128 mergers in the industry, 49 of which occurred in the fourth quarter. Through the third quarter of 1999, Pembroke Consulting tracked 68 mergers, and the pace was at a crawl in the fourth quarter.
Pat Parr, an analyst with ING Barings LLC, thinks part of the slowdown is due to companies taking a break to integrate all of their acquisitions.
"Integrating these acquisitions has proven more difficult for a lot of the acquirers than they anticipated," said Parr. "The initial benefits expected were perhaps a bit aggressive, and the realization of benefits has come slower than anticipated."
The inactivity in the marketplace doesn't mean that people aren't still talking. Cameron & Barkley and Integra Integrated Procurement Solutions, Inc. -- two privately held acquirers who don't have to rely on stock price -- say they are seeing lots of action. Each acquirer made three acquisitions in 1999.
"There doesn't seem to be as much activity, but we're still fortunately having some conversations with some folks," said Jim Warren, president of Cameron & Barkley. "It just doesn't seem to be as rampant as it once was. I think the expectation level may have come down some, but the good businesses still command a fair premium."
According to Warren, Cameron & Barkley's goal is to do 10 to 15 percent of its volume through acquisitions for the next five years. "So we're looking for $120 million or so worth of acquisition [revenue] in 2000," he said.
Integra also intends to be an aggressive acquirer in the coming year. "There seems to be less competition or less aggressiveness from some of the parties in the marketplace, but things have not slowed down for us," says Integra chairman Rudolph Huyzer. "In terms of the deals we have in the pipeline, we have more interest than we can handle."
Integra has a revenue run rate of about $145 million for 1999. With the deals in the works, Huyzer said, "I wouldn't be surprised if we would double sales in the next few months."
Indeed, while things have been quiet on the merger scene this year, people fully expect that buyouts will ramp up again. Fein predicts activity in 2000 to be at the same pace or slightly below 1999. However, he sees a big acceleration in 2001.
"I think the real shock to the system was the Asian crisis," said Fein. "Industrial demand for distribution products went down, the stock price of consolidators went down, and those stock prices haven't recovered. On the other hand, the fundamentals for consolidation are still there, and in 18 months we'll probably see some pretty intense activity again."
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