Interest rates may be falling, but deals in the plastics industry, especially injection molding, are fewer and tougher to complete. Tighter credit and the falling economy is taking its toll on the mergers-and-acquisitions business.
"Multiples are based on expectations of what you think of the future. We're in a pessimistic environment, so it drives down expectations," said Elliot T. Williams, president and managing director of RCW Mirus, an investment banking firm in Boston.
"A lot of people are in wait-and-see [mode]. We are in the beginning of possibly a recession or a turn-down in the economy, but we're pretty optimistic and don't think it will be long-term," Williams said.
Jeff Hamon, senior associate at RCW Mirus, said injection molders are feeling the pinch of rising resin costs coupled with a decline in orders. He pointed to high-technology and automotive companies as those hardest hit.
"It started at the end of the third quarter, but it didn't get so serious that they canceled midstream. But by January and February, people were backing out of orders," Hamon said.
The amount of equity needed to make a deal has been steadily rising, according to Hamon. He said statistics from S&P Portfolio Management Data show that in 1987, only 7 percent equity was needed for a leveraged buyout. That total hit 25 percent in 1993, 37 percent in 1999 and is more than 43 percent so far this year. It was 46 percent in February.
Jeff McKenzie, West Coast director of M&A activity at Houlihan, Lokey, Howard and Zukin, an investment banking firm in Los Angeles, said the plastics M&A market actually peaked in the third quarter of 1999.
Using data from his company's Mergerstat division, McKenzie said the number of deals is down about 40 percent since that peak.
He said this company tracked 10 plastic industry merger deals in the first quarter of 2001, but only three were in injection molding.
He also said injection molders are no worse off than the plastics industry as a whole. However, he did divide the injection molders even further, noting that proprietary molders fare better than average.
Hardest hit, he said, are custom molders, especially those in the computer, electronic and auto industries.
"Custom molders have no visibility and no control over the end market. They are subject to their customers and how well their customers are doing," McKenzie said.
Raymond B. Langton, chief executive officer of Applied Tech Products of Radnor, Pa., until recently was very active in injection molding acquisitions. His company made nine deals during the past two years but has not acquired any firms yet this year.
ATP's automotive and telecommunications sectors have felt the slump, but Langton added that the engineered plastics as well as health and cosmetics divisions are holding up very well.
"The lending market has tightened up, and the first thing that does is impact the price" of companies, Langton said. He noted that higher-quality companies simply will wait out the slump and hold out for a premium price.
Williams said valuations have dropped to about four to 41/2 times earnings before interest, taxes, depreciation and amortization. He noted that "to get five [times EBITDA], you really have to have something unique." Many companies were selling at seven times EBITDA a few years ago.
Higher pricing levels will not come back overnight, he said.
McKenzie added: "Clearly, there's no shift in the desirability of plastics companies. Plastics as an industry is still an attractive area."
The downturn is a matter of financing and the general economic situation, he said.
In film and sheet extrusion, mergers will continue to be steady, Hamon said.
"They deal with a lot of staple products. We haven't seen that much difference, except for the price of resin," he said.
Williams added that in film and sheet extrusion, "It's pretty clear that size does matter. A few years ago, you could be $30 million [in sales], but now you need to be much bigger."
He said sales of $50 million to $100 million is the new plateau.