Goliath just grew a foot taller.
For many of the Davids in the PVC pipe industry, the epic, $400 million marriage of J-M Manufacturing Co. Inc. and PW Eagle Inc. carries with it the promise of creating further disparity between the pipe-making haves and have-nots.
The leaders of the two companies aren't thinking about how the competition might react, but rather how their synergies ultimately can help them stay at the head of the pack in a highly competitive industry moving forward.
Livingston, N.J.-based JMM and Eugene, Ore.-based PW Eagle, the two market leaders in PVC pipe, announced Jan. 15 the signing of a definitive merger agreement. Upon closing, the firms' combined annual sales will be somewhere in the neighborhood of $2.5 billion, and will boast - conservatively, some say - about a 25 percent market share in PVC pipe.
PW Eagle will cease to be a publicly traded company, and its stock will be taken off Nasdaq as soon as the merger closes. PW Eagle subsidiary USPoly Co. LLC, a polyethylene pipe extruder, will join the JMM portfolio. JMM also is the market leader in flat-wall PE pipe.
There are many uncertainties moving forward. Because the merger is not expected to close until the second quarter and remains subject to PW Eagle shareholder approval and antitrust regulatory review, there is much that JMM and PW Eagle officials either cannot or will not discuss at this time.
In a Jan. 17 telephone interview, Walter Wang, JMM's owner, president and chief executive officer; and Jerry Dukes, president and CEO of PW Eagle, discussed the general management philosophy moving forward. Both indicated they will wait until the deal closes before discussing sensitive details, including the company's future management structure, possible plant consolidation and employment changes, where the headquarters will be located, and whether changes will be made regarding resin supply.
Wang made it clear that JMM is a privately owned company that, since November 2005, has been completely separate from its former parent company, Formosa Plastics Corp., a publicly traded firm in Taipei, Taiwan, run by Wang's family. Formosa remains a resin supplier to JMM.
There were several bids for PW Eagle, Dukes said, but ultimately, JMM's was the one that provided the most value to shareholders.
For JMM, acquiring PW Eagle will give the East Coast firm much deeper penetration in the West.
``This is a vastly competitive, and very challenging, industry,'' Wang said. ``It's going to stay that way moving forward.
``As managers of companies, it's our responsibility to bring growth and prosperity to employees. In order to survive, we must continue to grow.''
Dukes indicated his post-merger future is up in the air, though Wang said he would like Dukes to remain with the firm. Wang will be president and CEO of the new entity. Officials have not decided what to call the new, combined company.
Wang and Dukes said that current customers of both companies can expect no service interruption.
While smaller players might cry foul and fear the pricing leverage JMM will have in the marketplace, there is little reason to think regulators will obstruct the deal, several pipe industry sources said. As recently as the second quarter of 2005, regulators rubber-stamped the merger of Hilliard, Ohio-based Advanced Drainage Systems Inc. and Findlay, Ohio-based Hancor Inc., which were the two dominant players in large-diameter corrugated PE pipe. Today, ADS continues to dominate that market with an estimated $1 billion-plus in 2006 sales.
Reaction to the merger announcement was mixed from other PVC pipe producers.
``It's a move of historic proportions,'' said Dennis Stuhlman, president of Heritage West, a division of Weatherford, Texas-based Heritage Plastics Inc.
The sheer vastness of a combined JMM and PW Eagle should present some market-share opportunities for smaller pipe extruders, said Bill Raffaele, president of Heritage Central. ``We have mixed reactions,'' Raffaele said.
``We see it as somewhat of an opportunity, but a large manufacturer who's vertically integrated may have some advantage in the marketplace,'' Stuhlman said.
Alain Storet, president and CEO of Siloam Springs, Ark.-based Pipelife Jet Stream Inc., concurred.
``In PVC, it's No. 1 and No. 2. That puts a clear leader in terms of market position,'' he said. ``It will probably have some implications on the raw material side.
``It's always one of the difficulties in the market. The small guys, as we are, will face additional difficulties.''
All three men, Storet, Raffaele and Stuhlman, said they would not be surprised to see the JMM-PW Eagle merger prompt further industry consolidation, speculating that other PVC pipe makers might join forces in an effort to keep up with JMM.
Beachwood, Ohio-based Lamson & Sessions Co. has been the subject of many such discussions since an investment group that owns 9 percent of the company's stock petitioned the company to sell its PVC pipe business.
Troubled by the volatile pipe market and a recent special shareholders meeting where a doubling of Lamson's authorized shares - from 20 million to 40 million - was approved, New York-based Ramius Capital Group LLC wants a major stock repurchase and an immediate sale of the pipe extrusion business. Ramius officials believe Lamson's pipe business could fetch between $35 million and $70 million.
Lamson officials did not return phone calls seeking comment.
Pipe industry consultant George Coleman advises smaller companies not to try to compete on price with the big kid on the block, which just got bigger.
``They'll have a hard time competing out there unless they choose to just go with the flow,'' said Coleman, president of Texarkana, Texas-based Coleman Group. ``It's getting to the point where the small independents are going to have to make some real bold decisions.We're going to have a very interesting year.''