The plastics industries have held a long-term position as one of the most active segments in the world for mergers and acquisitions. The strength and duration of the sellers´ market has been amazing, but the industry has evolved for both buyer and seller, as both have become more sophisticated and more focused.
Prices have continued to climb for the most desirable sellers — but the best buyers increasingly compete for a precious few select sellers.
There are certain special pockets of focus with particularly intense M&A activity. Prime examples include companies serving the computer and telecommunications markets, or medical product markets. There are a great many aggressive buyers for each seller in these segments, and pricing, as a result, is often astounding. These are broad and very common examples, but there are also dozens of smaller, less-visible niches that come and go constantly as the latest acquisition hot spot.
One current example of such a target group would include what we might call "e-offshoots." They are the companies booming in secondary markets supporting a whole new type of commerce. They cater to the world of material handling, which supports the faster, inventory-reduced ways people are doing business today. They may make flexible belting or rollers for warehouse conveyor systems. They may make parts for precision sortation systems for United Parcel Service and Federal Express. They make lightweight parts for robotics equipment used in warehouses and plants. Douglas Group recently sold a manufacturer that had $40 million in annual sales in this segment for $67 million cash. Nice pricing!
Whatever the niche may be for a plastics processor, those that are commanding the truly glorious pricing inevitably are those with a great deal of focus. When buyers target a company with a medical focus, they aren´t looking for the company with 30 percent, or even 60 percent medical customers. They´re looking for 90-100 percent concentration. They want companies with superb technology and specialized expertise in a growing and profitable market segment.
The majority of processor companies serve a broad range of customers. These firms have grown up taking on new work as opportunities arose, with little attention to targeting any particular segments. Three-quarters of the world of plastic product manufacturers probably fall into this category.
Buyers would categorize such a company as a "custom processor." With good technology, current equipment, and decent profits and growth, these firms are quite desirable, but at more modest pricing. At the other end of the scale, we find very focused manufacturers of plastic products, with patented technologies or product innovations of a proprietary nature. These tend to be the most profitable and often most desirable companies. These proprietary manufacturers might represent 5 percent of the total plastic product manufacturing population.
A middle group, often in the hot market areas, includes a range of custom processors, without proprietary product, but with proprietary expertise and customer relationships in their specialty area. These companies tend to be technologically superior, with fast-growing and high-margin work, and often also can be at the top edge in desirability and pricing.
Plastics manufacturing has taken huge strides over the past decade to become an international business. In the strongest growth segments, manufacturers today must develop capabilities to serve well beyond regional boundaries. New plants may be located adjacent to, or even within, customer facilities. Companies are becoming increasingly skilled at taking advantage of a technological edge by moving quickly to serve markets around the globe.
In 2000 we estimate there will be at least three times the number of purchases of U.S. companies by European buyers than happened in 1995. Similarly, U.S. companies probably have doubled their purchases of European and Far Eastern divisions during the past few years.
The larger companies have long understood the importance of world market capabilities. Today, however, even the midsized processor is developing international capabilities. The direct impact on merger and acquisition activities is a tremendous blossoming of worldwide interconnections and ever more complex buy/sell opportunities.
Managing the cultural diversity of expanded international capabilities will create risk. Failures along the way will create opportunities for purchase of spinoff business segments. In summary, companies will continue to consolidate during the coming decade, and the changes to come will create tremendous opportunities for astute plastic companies in 2000 and beyond.
Douglas is managing director of Douglas Group, a private investment banking firm in St. Louis that represents plastic company owners in the sale or purchase of businesses.