When a company such as A. Schulman, M.A. Hanna, Hoescht or Clariant buys or sells a major business, competitors usually can determine with little effort who paid what for whom. The Securities and Exchange Commission dictates that publicly held companies disclose certain financial details of larger mergers and acquisitions, thus letting other firms know what the large, publicly held companies are paying.
But what about the privately held, $10 million to $75 million company? In the absence of readily available benchmarks, how do these companies determine the going price of today's middle-market deals?
The perception in the plastics industry is that acquisitions are on the rise and that today's market is a seller's market. From what our company has seen, this holds true, particularly in the thermoplastic compounds and concentrates segment, where prices overall are higher than plastics company prices in general.
All indications are that the forces behind these trends will persist through 1997, barring an unforeseen shift in the general economy. The question then becomes, if you are a middle-market buyer or seller, how do you determine a fair market price?
Let's begin by examining the acquisition climate and the underlying reasons companies continue to buy at high-end prices. There are a number of circumstances at play:
Globalization is pushing major suppliers such as polymer producers to acquire businesses in the compounding and concentrates sector overseas in order to supply their global customers. The recent acquisitions of Polymer Color and Plastic Materials Co. by Hoechst AG, headquartered in Germany, allowed Hoechst to establish a concentrates base in the United States.
Companies remain committed to strengthening their core businesses by acquiring similar businesses. As an example, Clariant Corp., while part of Sandoz, acquired Spectrum Color from Cookson Group plc to strengthen its U.S. concentrates business.
Some polymer producers are diversifying into the compounding and concentrates businesses to strengthen ties with their end customers and enjoy the perceived higher profit associated with the compounding industry. BFGoodrich's recent purchase of Mitech Corp. is a prime example.
Venture capital firms interested in buying thermoplastic businesses are lining up senior industry executives to help them. This tactic enables them to identify business opportunities within the industry and pay higher prices than was formerly the case.
With so many aggressive strategic buyers, today's sellers often can leverage the offers of competitive bidders to run up their selling price. Our research and work for plastics companies indicates that from the early 1990s to the present, prices for healthy middle-market companies that manufacture proprietary compounds and concentrates have generally been eight to 10 times earnings before interest and taxes (EBIT).
Companies with a strong performance record, better-than-average growth prospects and several aggressive suitors at their door may find a buyer willing to pay a higher EBIT multiple. Such was reputedly the case when Kawasaki Steel acquired LNP from ICI. On the flip side, a company with sales under $10 million may be sold at a lower EBIT multiple because of the perceived risks associated with buying small businesses.
Companies that do not own a proprietary product, such as custom or toll compounders, also are considered less valuable in today's market, as are companies with real or perceived environmental liabilities, companies facing major litigation or companies burdened with key employee contracts or underfunded pension plans.
In our view, the $10 million to $75 million company looking for a buyer should:
Sell before the end of 1997, provided the economy remains strong.
Benchmark its value within a range of eight to 10 times EBIT unless there are major opportunities or issues that will have an additional price impact.
Avoid whenever possible entering into an agreement that grants exclusive negotiation rights to a single bidder until you are confident you have obtained the highest price.
This is a seller's market - take advantage of it.
Ridenour is vice president of TransAction Group, a Cleveland firm specializing in domestic and international merger, acquisition and strategic transaction consulting.