The gap between top performers and small players in the plastics industry is growing, and with consolidation activity on the rise, companies are going to need to develop strategies to survive.
Compared to 10 years ago, there's a “larger gulf between the haves and the have-nots,” said Tom Blaige, chairman and CEO of financial firm Blaige & Co. LLC of Chicago.
The plastics industry has experienced rapid consolidation in the last decade. According to a 10-year study by Blaige & Co., on average, 55 percent of the top industry leaders in 2001 have merged or sold. This trend was seen across all segments — injection molding; blow molding; pipe, profile, and tubing; thermoforming; film and sheet; labels; and adhesives and sealants.
Of the remaining top companies, those with access to capital are 3.4 percent larger than those that are privately funded, Blaige added. Going forward, companies that use capital correctly will be stronger, experience more growth, and have greater staying power, he said.
While large companies (sales of more than $500 million) are growing, they make up only 2 percent of the overall market. Midsize ($50 million to $500 million) and small companies (less than $50 million) dominate the industry — 90 percent of plastics processors have annual sales of less than $100 million.
Despite their majority status, small and midsize players are rapidly losing sales to these powerhouses, Blaige said.
Businesses need to develop a plan for future growth and survival, and to do so need to identify their place in the market, he said.
During the last decade, top consolidators or “leaders” — defined as the top 10-20 percent of companies — have rapidly gained market share, using aggressive acquisitions and selective divestitures to stay ahead, he said.
Consolidatees or “followers,” the bottom 10-20 percent of companies, are quickly shrinking. These companies have remained behind the curve and have gone through restructuring and divestitures. They need to make tough decisions and develop a solid strategy to survive, he said.
“[They're] the typical American entrepreneur — proud and stubborn. But what they don't want to be is the American buffalo and go extinct,” he said.
Blaige dubbed the remaining 60-80 percent of companies “others.” If they don't start pursuing growth, they're in danger of undergoing slow erosion into a losing position, he said.
These companies must pursue niche leadership. They need to make selective mergers and acquisitions and start developing contacts and affiliations.
“It's not typical in America, but these are the types of transactions that are going to be essential for success going forward,” he added.
Having a plan will be vital over the next few years, as the M&A market shows no signs of slowing down.
“If the big guys have [consolidated] because of competitive pressure, there's even more pressure for the middle or small guys to consolidate, but they're not doing it,” he said. “This pressure will eventually break through, and in the next five to seven years there will be massive consolidation with the midsized, smaller players.”
According to the study, global M&A activity in the plastics industry has more than doubled in the last decade, from 215 deals in 2001 to 468 deals in 2011. Plastics has grown steadily throughout the recession, even while other industries have shrunk.
The majority of deals, 56 percent, were between international companies, a 16 percent increase from 2001.
BRIC — Brazil, Russia, India and China — geographies are experiencing the fastest growth, he added.
While the percentage of U.S.-only deals has decreased — 23 percent in 2011 vs. 32 percent a decade earlier — the actual number of transactions has increased by about 10 percent, he said.
The majority of deals, 80 percent, were strategically motivated — either strategic acquisitions or private equity add-ons.
Sellers, especially those struggling to put a deal together, should create a presentation highlighting the strategic opportunities they'd provide, like resin savings or an international customer base, Blaige said.
According to Blaige, it's a sellers market. “There's so much capital in the private equity market it's almost shocking,” he said.
Capital availability has increased tenfold in the last decade and valuation multiples are at near-record levels.
Private equity overhang has also grown 10 times larger in the last decade: There was $477 billion in uninvested private equity capital in 2010, compared to $48 billion in 2001.
Corporate and financial sellers have already started to embrace the favorable market conditions, and private sellers are getting ready to jump in, he said.
“Smart money is selling now,” he added.
Looking ahead, rapid consolidation will continue to change the competitive landscape.
Over the last decade, unprecedented “shocks to the system,” like 9-11, the global financial crisis, and skyrocketing material costs, have been permanent game changers for succession planning. This illustrates the need for businesses to develop a strategy going forward, Blaige said.
Smaller processors and converters must increase sales to at least $100 million or more annually. This will give them the best chance of success, he said. Both small and midsize players need to develop institutional practices, which will allow them to access funding.
Businesses of all sizes need to define their place in the market and plan accordingly, he said. Blaige presented his firm's 10-year study at the 2012 AWA Mergers & Acquisitions Executive Forum, held April 16 in Chicago. Amsterdam-based Alexander Watson Associates BV organized the event.