The party is over.
After eight years of record-setting deals, buyouts and financial wheeling and dealing, the mergers and acquisitions field is about to take a breather.
Investors and banks coping with the hangover from bad loans that backed failed deals are pumping the brakes to slow the race to consolidate.
Merger activity will not come to a dead halt, experts say. But both prices and the number of deals will drop through 2001.
"Pure buying for buying's sake is over," said Thomas E. Blaige, managing director for Goldsmith Agio Helms, a Minneapolis firm that has served as an adviser on dozens of plastics company mergers and acquisitions.
An economic slowdown, combined with some failed acquisition strategies, has dried up high-yield financing and made both bank debt and private money a little more difficult to get.
"There will be a ripple effect in the lending market," said Michael R. Murphy, a Chicago-based managing director of U.S. Bancorp Piper Jaffray Inc. "That and the overall pessimism in the economy has made lenders a little leery."
There are no exact figures on the amount of merger action in the plastics industry, but by any measure the past few years have been extremely vibrant.
Goldsmith Agio tracked 250 announced mergers and acquisitions between September 1999 and September 2000 — from the creation of PolyOne Corp. through the merger of Geon Co. and M.A. Hanna Co. to the purchase of a $13 million molder, Simco Industries Inc., by thermoformer UFP Technologies Inc.
U.S. Bancorp Piper Jaffray tracked a 40 percent jump in buyouts involving custom injection molders between 1995 and 1999.
Across the business community, there were more than 9,000 corporate mergers and acquisitions in 1999, with 2000 on pace to break that barrier again, posting nearly 8,700 through November.
In the first quarter of 2000 alone, there were 2,488 deals — up from the previous quarterly record of 2,391 transactions in 1998's second quarter.
Since the action's height in March, when almost 1,000 buyouts took place, the market has cooled to fewer than 600 in November.
But the game has not ended.
Fact is, many players have been waiting in the wings for this slowdown to make their appearance.
"The flip side of all this is, the strong companies are anticipating some great opportunities to buy," said J.A. Crough, director of the automotive group for commercial banking for the Canadian Imperial Bank of Commerce in Mississauga, Ontario.
Business owners looking to sell out, though, have to learn that the rules of the game have changed. Their operation is no longer as valuable to buyers as it once was.
Prior to 1995, injection molders typically could sell their companies for 5.5 times cash flow — or earnings before interest, taxes, depreciation and amortization — according to U.S. Bancorp Piper Jaffray's study. For deals that wrapped up between 1995 and 1999, the value jumped to seven times EBITDA.
"Now you're lucky if you can get three times cash flow," said Jeff Chung, director of advisory services for U.S. Business Exchange in Santa Monica, Calif.
Blaige and Murphy maintain that most companies will fetch four to five times cash flow.
Many banks and private financial backers are not eager to put up money on a deal, unless they can see clear value in it.
"It won't come to a halt," Murphy said. "What happened is that the good company with good customers and good management — if there's a strategic reason to buy — they'll get it.
"It's the marginal company that was looking to ride the wave and sell out — those are the deals that won't happen anymore."
Clarion Technologies Inc. began its growth spurt during the tail end of the merger-mad 1990s.
The Holland, Mich.-based molder of parts for the automotive, consumer products and office furniture markets posted just $1 million in sales in 1998. In 1999, it launched its strategy with the purchase of a technology-rich development center.
Clarion followed that with three more acquisitions through mid-2000, with a goal toward achieving $500 million in annual sales within five years. Even a year ago money wasn't easy to obtain for acquisitions, Clarion President Bill Beckman said. Now it has gotten even tougher to reach.
"We're starting to have this recession mind-set, and so there's a lot of pulling back," he said. "It isn't that there isn't money out there, it's just that it's very tight."
For the time being, Clarion is putting increased emphasis on its bottom line, but the company still is keeping its eye out for the right deals.
"We've got to manage through the downturn," Beckman said. "That's our No. 1 priority. But we're not going to change our strategy just because of it."
The fundamentals of any buyout remain the same in any economic climate, Crough said: Find good management with a solid business plan, and you will find a company worth the investment.
"For the right operator and the right business case, then capital is available," he said. "Management is so critical. With the right management, even in down times, a company can continue to do well."
"Anyone can get money," Chung agreed. "What people don't have is the management and the strategy."
Achieving those benefits will be at the heart of any continued growth in the mergers and acquisitions arena, Murphy said.
"People are more discerning about where they put their money," Blaige said. "They're moving back into manufacturing, but they're looking for niche and growth opportunities."
Companies anxious to follow their customers into new geographic areas will be on the lookout for buyout targets, he said. Likewise, a business offering a value-added edge for its customers will find it easier to access money to grow — potentially by selling either a minority or majority stake in the operation.
Plastics remains a fragmented industry that will stay ripe for consolidation, analysts said.
In custom injection molding alone, 574 companies produce $24 billion in annual revenues, according to the Piper Jaffray study. Of those, nearly half of the businesses have sales of less than $10 million annually.
It is only natural for mergers and acquisitions to continue, he said. Any slowdown this year is the exception.
"The overall M&A market may be past its peak, but you've got to keep it in perspective," Murphy said. "We may be past the peak, but we're still 10,000 feet above sea level compared to where we were.
"There is this short-term hiccup that will slow some activity, but there are still some long-term strategies that will continue to drive business."