Times are changing for owners of plastics businesses.
Through direct involvement in the M&A sector for over 2½ decades, I have noted many evolutionary trends in industry structures as well as in transaction practices.
As the third-largest manufacturing industry in America, with relatively modern roots and a much greater-than-average level of fragmentation, the speed of consolidation of the plastics industry is truly unique and effects of consolidation have deeply impacted industry participants. Our recent consolidation study shows that approximately 50 percent of the top 50 U.S. players in each plastics segment have either merged or sold over the past 10 years.
The Darwinian forces of the market have segmented businesses into three categories: “leaders,” “followers” and “others.” The key take-away is that if consolidation has such a dramatic effect on the largest and strongest players (“leaders”), its impact on the midsize and small players is more extreme (“followers” and “others”). If they want to survive and thrive, they will need to start speaking the language of their larger counterparts.
Over the past decade, consolidators have bulked up in size through organic growth and consolidation, the amount of available private equity capital has grown more than twentyfold and the average-size deal sought by private equity funds has tripled to $150 million. Concurrently, the number of banks providing deal financing has plummeted while the average-size transaction loan has skyrocketed. Thus, we have transitioned from the microdeal in the 1980s to the lower-middle-market deal in the 1990s and 2000s to the megadeal in the decade ahead. Uninvested “dry powder” in the hands of private equity firms has risen from $20 billion to nearly $500 billion over the past decade, with 90 percent of the increase occurring in the past five years.
With this huge overhang of uninvested private equity capital, even the consolidators of the plastics industry are under the microscope and must apply “institutional” standards to their M&A and strategic activities. Even then they could go the way of Reynolds, Pactiv and Alcan Packaging.
Owners of privately held and family plastics businesses will find it increasingly difficult to achieve premium valuations and to source funding for their businesses if they do not possess the characteristics that lenders, strategic buyers, or private equity investors (institutions) now seek. An analysis of the consolidation in plastics shows that as we move into the next decade, owners of plastics companies will increasingly be required to learn and apply strategies and practices typically utilized by institutions.
Strategies to consider include:
* “Institutionalization,” “professionalizing the organization,” and the picking of low-hanging fruit have been strategies historically reserved to professional financial and corporate buyers. Understanding and adopting these processes will give owners of small to midsized businesses an advantage, not only when dealing with these buyers, but also as they become sophisticated buyers themselves.
* Meaningful, robust budgeting processes, management succession in place, detailed competitive analysis, and profitability management to incorporate product-line pricing and costing models are important.
* Identifying complementary acquisition targets and keeping in touch with competitors is considered a value-enhancing activity. Showing evidence of a successful acquisition program will impress.
* On the M&A side, securing professional representation and preparing a credible business plan, a polished management presentation and a virtual (online) data room are expected. After all, despite having firsthand experience in selling businesses, private equity investors bring in specialists to handle the sale process as it has been proven to be a key element to maximizing results in a transaction.
* While private equity investors, as a rule, avoid selling on a “one-off” basis, they go to great lengths to find one-on-one deals to purchase directly from an owner as they represent one of the most, if not the most, profitable acquisition strategies. Fundraising pitch books prepared for potential fund investors denote the “proprietary deal flow” pipeline as a core value-creation strategy. Further, both private equity and strategic buyers keep multiple “irons in the fire.” They look at and visit dozens of companies yearly, and while they make offers on several, the average middle-market fund completes only one to three deals per year. Thus, a deal, its price, terms and other characteristics are compared to the universe of opportunities available at a given moment and decisions are made to proceed as planned, abort, or to proceed at a different (typically discounted) price. Since the landscape of opportunities is dynamic, the position of a company on the buyer's priority scale also changes. Having professional representation to consistently probe and verify that you are the top deal in the “system” is invaluable, and will result in a higher transaction value.
* Businesses “For Sale by Owner” are perceived as less sophisticated and less competitive, signaling “discount pricing” to the most capable institutional market buyers. If a confidential memorandum and data room are not prepared in advance, many investors will jump to the next deal in which the investment has been made to provide a methodical process with organized data. Sellers are in competition with many other potential deals, so creating a quality work product describing the uniqueness of your business is imperative. Many private equity firms receive multiple deal books weekly. Those that are well-prepared and tell a great story are perceived as attractive businesses and are put on the top of the pile. Others never get reviewed at all. You may be told that the lack of a “book” and data room are actually preferred, however this is very unlikely to be the case where a premium price will be offered.
* Finally, it is important to involve a professional adviser early and share the ups and downs of the business. Together business owners can formulate an M&A strategy that will have very valuable long-term benefits even if they decide not to pursue a transaction in the end. The decisions will have been made strategically for the business and not as a reaction to short-term influences.
These are just a few examples of how to secure and maximize the value of a plastics business. Owners spend a tremendous amount of time and energy on procuring raw materials, attending global trade shows to procure capital equipment and cultivating customer relationships.
It is likely that most owners will need to re-evaluate their priorities if they desire to make it all worth it at the end of the day. This applies to the vast majority of plastics company owners as they fall into one of the three categories the market dictates. While “leaders” and “followers,” whose destiny is largely fixed, make up only 20-40 percent of the universe, the “others” have the opportunity to learn and incorporate the strategies being used by large consolidators, allowing them, too, to become “leaders.” They have a choice.
Blaige is chairman and CEO of Chicago-based investment firm Blaige & Co. LLC.