(July 4, 2005) — As this week's Plastics News makes clear, many companies are looking for buyers. In the first six months of this year, the sheer volume of healthy plastics processors attempting an ownership change has climbed to staggering levels. Equity firms attempting to sell companies are active and engaged.
Those upward trends come at a time when the economy seems to be rebounding. For the first quarter of 2005, U.S. gross domestic product grew by 3.8 percent, three-tenths of a percentage point better than many experts had predicted in May. For some economists, that heralds an expansion in U.S. business.
The number of potential plastics deals on the market, coupled with the prospects of renewed economic growth, can mean optimism. A sale can be an encouraging sign, especially if it allows further expansion for a company that is bought. These properties sometimes are held by owners that cannot afford to boost development or operations to the next level.
Yet, why is there little rejoicing on Wall Street or in corporate offices? Instead of marveling at the turnaround, equity firms are calling this a lackluster year so far, one that has fallen below expectations. It has been both a dynamic year and a difficult one for them too.
It seems that there has been a disconnect between buyers and sellers. Sellers want to sell but only if they can gain a high targeted valuation. Buyers, many of them backed by equity firms, want a quick return and a fair price.
Too often this year, the two sides have not met in the middle, according to equity sources. Deals have fallen away and companies have been taken off the market. Some are lingering in a suspended state, not yet sold but still available, for months on end.
In some ways, acquisition activity can be a house of mirrors. Unless those deals actually get done, the number of companies for sale does not reflect a purchase. The sale companies become expensive suits in a store window that get ogled but not sold.
How much can be read into the economic trends and their effect on the plastics industry? A troubling sign, according to equity firms, is that potential buyers are noticing a decline in profit margins for sale companies. Cost squeezes on resin are primarily to blame, although a lack of operating efficiency can also be the cause. Some equity firms particularly are shying away from plastics manufacturers due to the taint of low profits.
Those that are not finding the waters conducive to a sale are looking for other options, including recapitalizing debt to help with growth. But a heavier credit burden could weigh heavily in future years, especially as interest rates edge back upward.
A larger question looms: How attractive are North American plastics companies in our rebounding economy? Many of the larger recent deals involve companies moving outside North America to buy properties.
All are important questions. The second half of 2005 could answer many of these, if some of the long-awaited deals get completed. Some larger companies, including Tyco International Ltd. and Carlisle Cos. Inc., are attempting to sell plastics units.
If what is available is used as an indicator, the number of transactions could pick up. The industry is waiting for a sign.