NEWTON, MASS. —It's not your imagination—distributors and manufacturers really are buying each other and selling themselves more frequently these days. In just the last 12 months, news has broken on, among several other deals, Hughes Supply's purchase of Todd Pipe & Supply; The Home Depot's purchase of White Cap Construction Supply; and manufacturer Milwaukee Electric Tool being put up for sale. And indications are that mergers and acquisitions will not only continue at this pace, but will increase in the near future.

"The environment is getting better for these deals, and not just in distribution either," said Holden Lewis, senior vice president at BB&T Capital Markets' Industrial Services in Richmond, Va. "Looking at the broader industrial space, there has been a pickup in deals being made. Why? Simply stated, when profits go up, sellers can demand more from buyers, and when the outlook on profitability is stronger, buyers are willing to pay more to sellers."

That outlook on profitability, while in hiding during the economic recession, has increased exponentially recently. Now that buyers can find the right value for their dollars, they are more willing to buy. Their balance sheet is stronger. Sellers come out ahead in that scenario, because they can ask for more for their business, and have a better chance of getting it.

"There is no question that the rate of consolidations and acquisitions has gone up," said Adam Fein, founder and president of Philadelphia-based Pembroke Consulting. "There are three things driving this: first, owners feel they missed their opportunities in 1999, when the market peaked, and are now willing sellers; second, there has been a large increase in leveraged buyouts in the last 12 to 18 months; and third, the market continues to evolve and change, and owners are reluctant to put more money into the industry."

These three things, said Fein, create an environment that fosters buyers' and sellers' activity.

According to results from INDUSTRIAL DISTRIBUTION's 58th Annual Survey of Distributor Operations, compared to 2003, 38 percent of respondents expect more mergers and acquisitions among all distributors in 2004. More interestingly, compared to 41 percent in 2003 and 37 percent in 2002, 52 percent of the larger distributorships are seeking acquisitions.

Acquisition activity among the smaller distributorships is comparable to last year.

Among the 58th Annual Survey respondents pointing to a higher level of consolidation, 20 percent believe it will turn into more sales for their distributorships, while 10 percent think it will cause a drop in sales.

Results also show that the percentage of distributors who would welcome an acquisition offer has risen to 37 percent this year. 2002 and 2003 both showed 36 percent welcoming an offer, up from 2001's 30 percent. Of those willing to be acquired, the smallest were the most, at 42 percent of those with less than $5 million in sales. Just 25 percent of those with more than $20 million in sales said they are willing to be acquired.

"Two factors are affecting sellers right now, although the economy has certainly helped," said Fein. "Personal and family reasons—such as succession issues or estate planning—may drive some to come back into the market after the last five years to sell, and industry considerations, including sales volume and profitability."

Said Lewis of the increase in movement, "It's important to note that buyers never stopped wanting to buy. There was a lack of activity due to the low outlook on profitability. I expect to see the continuance of the acquisitions at this healthy pace. The pipelines look better, so their prospects are up."

While most industry watchers don't believe that the recent increase will come close to the giddy level of deals in the late '90s, they also feel that this movement is far from its peak.

"Companies, when it comes to acquiring, are looking more strategically, rather than just needing to get bigger," said Lewis. "Bigger deals will be made, and there will be more foreign activity as well."

Said Fein, "There is a lot of pent-up demand for buyers, and the activity will increase. There are some big-picture trends changing the industry, manufacturing going offshore chief among them, affecting the environment still. The market is still turning."

Acquisitions, though, are an important part of the consolidation of the industry. As time goes on, the big players will get bigger.

"Complete consolidation of the industry is a very long time down the road, but eventually, distribution will look like the banking industry today," said Lewis. "Your big players, such as Grainger, will be national, and the smaller distributors will be more local with their presence. The mid-sized distributor will be gouged out."