(July 9, 2007) — According to data from Blaige & Co. LLC of Chicago, the plastics industry is in its fifth year of an M&A up cycle. So we have to ask, when will the deal flow subside?
In the near-term, several factors may cool the frenzy, including the run-up to the 2008 U.S. elections. The threat of a change in the capital gains tax rate looms large over sellers. Also, long-term interest rates may increase, and banks may tighten lending terms.
M&A activity also could be affected by the performance of the U.S. economy. The Commerce Department reported just two weeks ago that economic growth is weak, crawling along at a pace of 0.7 percent in the first quarter.
Also, private equity buyers, which have played an important role in the M&A upswing, may be under further scrutiny by the government. New York-based Blackstone Group LP's recent initial public stock offering has some in Washington questioning how those firms are taxed.
Has a slowdown already begun? Stamford, Conn.-based Thomson Corp. released figures recently showing that in the second quarter, $1.65 trillion of merger deals were signed around the world across all industries. But a recent report in the Wall Street Journal points to a slowdown in the flood of cheap credit.
So for all that has risen in plastics over the past five years, the brakes might be applied to slow the M&A pace a bit. Although the ride has been good, that which has been speeding along eventually must slow down.
These days, private equity buyers get most of the attention in the mergers and acquisitions game. But they're are not alone. Plastics processors are playing a big role too, as strategic buyers, thanks to strong cash flow at many manufacturers, and their need to build bigger footprints to serve global customers.
The plastics industry still sees private equity playing a big role — just ask any of the small-business owners being contacted weekly by potential buyers. That trend will continue — despite the fact that not all firms have good experience on the acquisition trail.
Consider the packaging market, for example. According to a recent analysis from Winston-Salem, N.C.-based Wachovia Capital Markets LLC, packaging firms are more rational about M&A deals these days, with a focus on price and value creation and sophisticated in capital allocation relative to the mid- to late 1990s, when several packaging companies misfired on large acquisitions.
Wachovia considers several strategic buyers as having the best overall acquisition records, including publicly held players like Ball Corp., Pactiv Corp. and Sonoco Products Inc. Wachovia analyst Ghansham Panjabi estimates $30 billion in packaging assets could be absorbed by purchasers in the next few years.
It will continue to be a busy time for packaging because the supply chain is consolidating, and other variables are affecting deal-making, including the need for materials diversification. But each end market must evaluate M&A viability, as macroeconomic indicators point to a relative slowdown over the next 18 months.
DeRosa is a Plastics News staff reporter based in Akron, Ohio.