(Jan. 17, 2005) — If you believe the merger & acquisition experts, a lot of money will change hands in 2005. The deals will fall faster than the part in Donald Trump's hair.
Media pundits in revered publications like the New York Times are forecasting a big boom year. So are many of those equity and banking firms and outside consultants who are helping to swing deals for both buyers and sellers. Of course, they get paid if a deal goes through, so their judgment can't exactly be called objective.
Still, many signs are pointing to a heating-up in acquisition activity in the plastics industry. The stars seem to be adequately aligned after several sluggish years. It hasn't been that long since there was little bank credit to be gotten and few buyers willing to take a chance during a down economic cycle.
Now, there is cause for optimism. While interest rates still are low, bank debt has been freed of prior constraints and lending is plentiful. Equity firms have a lot of cash to spend — one M&A consultant referred to them as drunken sailors looking for a port — and a critical need to build their portfolio funds.
But before you start thinking that your firm is next on the sales block in a new rush to Babylon by equity firms and cash-rich competitors, think again. Don't go reprinting your business cards just yet.
We've all heard the talk. It seems that every January, prognosticators pull out the same word to describe the state of the plastics industry. That word is consolidation. There is always a pressing need for the industry to consolidate, to absorb capacity, to slim down in a post-New Year's diet. But even with the economy improving, it would be wrong to believe the pace of M&A activity will be anything like it was in the more-frenetic 1990s. According to Bill Ridenour, president of Polymer Transaction Advisors Inc. of Newbury, Ohio, about 160 deals were completed in the North American plastics industry last year. That sounds good compared with the 120 or so transactions per year we'd seen earlier in this decade. Still, in 1999, more than 200 deals were consummated, he said. We have a long way to go to reach those numbers.
While the economy is improved, there is still some apprehension about how long the comeback will last or how quickly it will strengthen. While bank debt is more available, not all companies want to incur that hefty leverage while uncertainty lingers.
And while consolidation is a positive if it shaves costs for the industry, competition also has its benefits.
The fact that multiples are climbing for transactions could work against some M&A activity. While sellers might rejoice at the fact that prices are moving higher, an equity firm looking for a quick profit on its investment might not be so overjoyed. After all, those firms want to sell again in three to five years and pocket a nice return on their investment. A multiple over seven times earnings might cause them some pause.
We're not saying that M&A activity will not heat up or that sellers should hold onto assets when it is time to sell. But be wary of false promises of a wild sellers' market; it might make more sense to tend to your business and not worry about when the money will change hands for it.
The M&A boom might be here, or the boom might be quieter. If you're in M&A work, it might be wise not to start the party before the guests arrive.