Owners and managers of plastics and packaging companies must understand, adopt and effectively use mergers & acquisitions as a core strategy if they are to survive the global consolidation.
Three distinct groups are quickly emerging: the leaders/ global con-soli-dators (for example, Alcan, Amcor, Bemis, Printpack and Sealed Air alone control 32 percent of the flexibles market), the followers and the “others.”
While the leaders aggressively acquire target assets and cast off the noncore elements, the followers try just to survive, and the “others” experience a slow erosion of their share. Eventually, the followers close shop or are acquired — positioning to maximize immediate value for the business is paramount. The “others,” representing the largest number of companies — say 50-60 percent — middle market operators with $20 million to $500 million in revenues, will eventually become followers if they do not identify a niche and aggressively build critical mass through acquisition.
Many factors are driving the consolidation, including large and growing global customers that are requiring suppliers to think locally but act globally. National and international capabilities are essential. When competitors offer global solutions, you must be in a position to respond. Economies of scale afford larger competitors greater leverage to purchase raw materials at discounts of several cents per pound.
The need to consistently develop new products and run new raw materials requires significant capital investment. In addition to these competitive issues, the following factors are increasing the pain: tripling of resin prices since 2001, foreign imports, drain of talented management in the middle market, risk associated with funding the “next level” of growth required to be competitive, and the liquidity, succession and value preservation issues for the large number of aging entrepreneurs.
The Flexible Packaging Association reports that the share of U.S. industry volume controlled by companies with $50 million to $500 million in revenue has decreased from 45 percent in 1996 to 30 percent in 2005. Of the 452 U.S. packaging concerns it identified, 352, or 78 percent, control only 14 percent of 2005 volume and show average revenues of $8.7 million.
By comparison, the top 100 have average revenues of $187 million. Our analysis of the top 40 film and sheet packaging producers as ranked by Plastics News had two startling conclusions. First, 83 percent were involved in some sort of M&A activity between 2000 and 2005. Second, 43 percent changed ownership or were eliminated by consolidation over the same period.
M&A activity has increased in recent years according to Blaige & Co. proprietary data as well. The number of global film and sheet packaging deals has doubled from 29 in 2002 to an estimated 58 in 2005, of which 65 percent represented strategic acqui-sitions. Financial acquisitions represented 35 percent of the total, composed of 21 percent platform acquisition and 14 percent add-ons to existing platforms.
Tremendous amounts of uninvested private equity capital and open credit markets have driven financial deals from an estimated 12 percent of the total to the 35 percent estimated in 2005. Indicative of the trend toward globalization, transactions involving non-U.S. participants now represent the majority of deals. Recent platform acquisitions of Tyco Plastics and Nordenia and Exopack, and add-on acquisitions of Vanguard Plastics, P&O Packaging and Packaging Dynamics are examples of private equity activity.
M&A execution currently bears many similarities to golf — there is lots of deal activity but also lots of poor execution. Even the largest deals, such as Tyco Plastics, exhibit significant destruction of shareholder value due to poor execution by management and investment bankers. There are many actions that plastics and packaging executives can take to prepare for and then successfully execute M&A strategies. Identify a competent M&A adviser, identify your position — consolidator, follower, “other” — establish a one- to five-year plan, stick to the plan.
Blaige is chief executive of Blaige & Co., based in Chicago, Ill. The firm is a leading transaction adviser to U.S. and foreign corporations and private equity firms in the plastics, packaging and chemicals industries. Its activities focus on middle-market merger, acquisition, divestiture, sale, recapitalization, management buyout and joint venture transactions.