NEWTON, MASS. — The biggest distribution story in the 1990s was the number of mergers and acquisitions that swept through the industrial marketplace. Every day, it seemed, one company was buying another. Valuations were high and were getting higher. Rising stock prices prompted rollups of independent distributors into publicly traded enterprises.

Then reality hit and merger activity slowed.

In fact, mergers and acquisitions dropped sharply last year. The Wall Street Journal recently reported that the value of U.S. deals in 2002 fell 41 percent to $447.8 billion, its lowest level since 1994. The number of U.S. deals fell to its lowest level since 1993, indicating that the business of smaller and mid-size deals is also off, the newspaper reported.

During the last quarter of 2002, there were several large deals in the distribution/manufacturing sector, leading to speculation that there could be a slight breakthrough in such activity in 2003.

Chief among the acquisitions was the November announcement that the Newell Rubbermaid Co. had agreed to purchase American Saw & Manufacturing Co., a manufacturer of hand tools and power tool accessories. The purchase price was $450 million in cash. Rubbermaid had announced earlier that it was purchasing the remaining assets it didn't already own of American Tool Companies. Sources say Rubbermaid isn't through with its acquisition fever and is in the market for a power tool manufacturer. Rubbermaid is clearly a company to watch under the direction of its new top executive, Joe Galli, formerly of Black & Decker Corp.

Buy-outs also affected software companies serving distribution. Late last year, Intuit purchased Eclipse, a software company. And Prophet 21, another leading software company in the distribution sector, was taken private by management.

More recently, last month's announcement that Barnes Group would purchase Kar Products seemed more evidence of a rise in merger activity. Terms of the deal were not disclosed, but the purchase was expected to be complete by the end of the first quarter. Kar Products will add more than $120 million in annual sales to Barnes Group's Barnes Distribution unit. The deal represents the eighth acquisition for Barnes Group since late 1999.

Barnes Distribution ranked No. 24 in ID's Top 100 Distributors report last year, while Kar Products, a former unit of SunSource, Inc., debuted at No. 37.

No one is predicting that this is the start of major merger/acquisition activity, but many expect it to increase.

"Merger activity in industrial distribution will slowly gather momentum in the next 18 months, although we won't see a return to the late '90s anytime soon," says Adam Fein of Pembroke Consulting, a well-known firm that closely monitors merger and acquisition activity in the distribution sector.

Fein points out that M&A activity in industrial manufacturing will be "hot and heavy" in 2003.

"There are more sellers of distribution companies than buyers right now," he says. "However, many sellers of distribution companies are unwilling to accept a realistic valuation for their business. The pressure to sell will become intense as segments of the U.S. industrial manufacturing base move offshore."

Fein adds that: "valuations for industrial distributors were unreasonably high in the '90s. Sellers recognized the cycle and got out at the top."

INDUSTRIAL DISTRIBUTIONS 56th Annual Survey of Distributor Operations shows that only four percent of distributors merged with, or were acquired by, another company late in 2001 and early 2002. The study showed that the number of mergers and acquisitions had steadily de-creased since 1998.

The study also showed that the number of companies actively seeking to acquire another distributorship peaked at 28 percent in 2000. Last year only 18 percent of distributors were actively looking to acquire another company.

Comments from distributors over the last year illuminate the situation. One distributor told us he'd begun acquisition talks early last year, but ruled it out based on the low valuation put on his company. On the other hand, other distributors have said they may be forced to sell because of the economic downturn and an inability to stay in business. Another distributor executive, who is looking to acquire companies, said he expected to close a few deals in 2003 because of economic difficulties faced by those potential acquisitions.

Another industry expert, Jim Mulick of Ameridan Resources, LLC, which also tracks merger activity in the distribution marketplace, agrees with Fein's assessment.

"I don't see any time soon a return to the boom of the late 1990s," he said. But, he does note that the economic rebound appears to be in its early stages and that merger activity will be higher this year than last. He expects more deals to accelerate and a "lot more interest" in transactions among acquirers.

Chuck Stockinger, executive director of the Industrial Supply Manufacturers Assn., says he expects to see the industry continue to reorganize itself as it deals with market realities.

Stockinger also points out that the real problem today — and one that has to be dealt with — is that the U.S. manufacturing base is still not growing. The country has to face the fact that too many manufacturers continue to move offshore to the Pacific Rim, especially China, because of lower labor costs.