(April 11, 2005) — The financial titans of Wall Street are about to drop a bundle of cash on your doorstep.
If you believe the pronouncements from those who work with mergers and acquisitions for a living, private equity firms are slavering at the prospect of buying a plastics parts producer. Packaging is an especially good target, but automotive, medical and building/construction make nice properties too.
Most recently Ken Brooks, senior vice president of Ernst & Young Orenda Corporate Finance in Montreal, spoke of the hunger of equity firms during Packaging Strategies 2005 in Atlanta. He told of the tremendous volume of capital available to financial sponsors. Last year, equity groups raised $85 billion, the highest level since 2001, Brooks said.
Plastics is a big target, partly due to its fragmentation. Translation: There are a lot of smaller companies that need cash to grow. And few have the bucks that equity firms do to buy out those real-life Monopoly properties.
There is a lot of money chasing deals right now, if you believe the rumors. It is a sellers' market, with valuations frequently at a multiple higher than seven times earnings. Some people are making serious money by selling their businesses.
Injection molder Kerr Group Inc., blow molder Liquid Container LP/Plaxicon Co. and pipe extruder Hancor Inc. are names recently said to be on the market. More are privately whispered about.
But like a game of Monopoly, there is both risk and reward inherent in a selling strategy. Processors should be aware that equity firms usually treat their properties as just that — something to hold onto for a short time, sell again and make a decent return. They are not in it for long-term viability or product growth; to put it crassly, they are in it for the money.
“It's a results-oriented culture, and a CEO needs a realistic appreciation of what the goals are,” said partner Timothy Walsh of New York-based J.P. Morgan Industrial Growth Practice Group in New York, at the Atlanta conference.
Another speaker, Chairman Donald Graham of York, Pa.-based Graham Group, said equity firms do not usually form cozy relationships. They want good management decisions that yield results in three to five years, Quarterly results are critical, he said. Patience is not a great virtue. For a company that is used to running at a lower-stress pace or in plowing resources back into product development, the change can be a shock.
Equity buying has a generous upside too. The financial acumen of equity firms has helped shape up management at companies that had grown too lax. Some companies need a good boot in the behind to move forward. An equity firm's boot can be size 15.
And for a well-run company, not much change may be noticed. Growth to an equity firm often means opening new plants, or another acquisition that makes a molder even larger. Growth can quickly snowball.
Equity firms' supposed run on plastics processors might sharpen our industry and focus it on results. It could lead to more shakeout of soft companies and make some firms more profitable.
But remember that for some molders used to running a viable, longer-term business, a stronger focus on the immediate can immediately make for more stress.