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March 02, 2009 01:00 AM

Grappling with the risk, returns of M&&A

Frank Esposito
Senior Staff Reporter
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    To celebrate Plastics News' 20th anniversary, we continue our weekly countdown of the Top 20 issues of lasting impact, as reported in our pages. The series will end with the No. 1 issue in our 20th Anniversary special edition March 16.

    This week: No. 3: Major mergers and acquisitions

    Ground zero for Plastics News' coverage of mergers and acquisitions came Oct. 26, 1998. That's when PN reported on its front page that Newell Co. had bought Rubbermaid Inc., Clorox Co. had acquired First Brands Corp. and Berry Plastics Corp. had picked up Knight Engineering and Plastics.

    The first two deals qualified as blockbusters, while the third was an early chapter in Berry's empire-building. Overall, that front page was an indicator of how the plastics M&A market was revving up in the late 1990s, on its way to becoming a red-hot engine in the 2000s.

    But differences remain as to whether M&A — and the role of private equity investors in it — is an engine of growth or an engine of destruction.

    For every point made in favor of M&A during PN's 20-year history — and the last 10 years in particular — a counterpoint can be made. Berry has created a $3.5 billion packaging empire with the help of private equity money, but it also has posted financial losses in each of its last two fiscal years. M.A. Hanna Co. assembled a compounding and distribution network from a history of ore mining, but the firm was struggling even before it merged with Geon Co. to form PolyOne Corp. in 2000.

    Tyco International Ltd. forged a business with almost $2 billion in annual sales of trash bags, plastic sheeting and duct tape, but ended up selling most of it to Apollo Management LP — a recurring major name in plastics M&A — for just under $1 billion in 2005.

    So should we credit M&A — whether it be from strategic competitors within the industry or from well-heeled financiers with no plastics background — with the growth that allowed these companies to extend far beyond their entrepreneurial roots? Or do we hold M&A accountable for creating unwieldy corporate entities that end up toppling under their own weight?

    As with many issues the industry has grappled with during the last two decades, the answer's somewhere in between both extremes.

    Berry Chairman and Chief Executive Officer Ira Boots always has been clear about the value of both M&A and private equity in his firm's success. “In 1990, we reached out to a private-equity partner in order to compete with the global companies we were going up against,” Boots said at Plastics News 2007 Executive Forum in San Diego. “We went from $57 million to $250 million in sales in the first five years.”

    Boots also observed: “The way we see life is, you're either a platform company and growing, or a bolt-on acquisition to one of us.”

    At that same 2007 event, M&A veteran Jeff Dancer took a look at the other side of the coin.

    “Private equity wants to get in, ratchet it up and flip it,” said Dancer, who suffered an early death at age 54 later that year. “What's going to happen is that prices will go up until multiples are too high and private-equity companies say it's too much risk?”

    One truth that has become self-evident in the M&A field is that timing is everything.

    Tyco clearly outstayed its welcome in packaging, but a firm such as Ripplewood Holdings did better than OK.

    Ripplewood — a New York private equity firm — bought Kraton Polymers from Shell Chemical Co. in 2001, then turned around and sold it to another private equity investor — Texas Pacific Group — in 2003 for $770 million. That's a two-year profit of $250 million — or 48 percent.

    It's hard to match that in the stock market, even in good economic times.

    That's really the dream — or, in more academic terms, strategy — that every private equity firm has held on to as they've made their way through plastic resin, machinery, packaging and distribution during the last 20 years. It's a dream that may seem a little distant in the current rocky climate, but time will tell that it's a dream that's hard to give up.

    Esposito is a Plastics News senior reporter based in Akron.

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