Is Industry Consolidation Coming?
Mergers and acquisitions increase in down economies – will you be a partner or prey in ’09?
If you haven’t heard, we’re in a recession. If you have heard, ignore the media
sensationalism. Anyone that’s been around a few decades recognizes this as a very
typical recession, with slower growth, higher unemployment, and tighter credit markets.
History says we should see a robust recovery within a year or two. However, history
also teaches us that some companies will not survive this downturn, and that others will
have to downsize considerably to make it.
Amazingly, we also learn the opposite is true. History is proof that many companies
thrive in tough times and consistently grow sales and profits. And invariably, a few
cash-rich companies will grow enormously in a recession – by merging with equally
strong partners and/or picking off beaten-down competitors at fire sale prices.
How will wire rope distributors and fabricators weather the current slowdown? In one
way, we are recession “resistant” because our products and services are used across
diverse industries. For instance, the construction vertical is slow now, but the energy
sector remains strong. And, while American wire rope manufacturers have lost out to
cheaper foreign steel, customers still require local service, so offshore fabricators are
not a viable threat. Instead, a stronger dollar and sagging global demand will lower our
steel costs even more.
On the other hand, the recession is hitting some regions and market segments harder.
Construction activity is slow in states with high foreclosure rates. Any manufacturer of
consumer products is seeing lower revenue. Land and air transportation companies
are logging fewer miles; however, lower fuel costs have eased their losses. The bubble
has burst for marine shippers, though, as it may be years before China’s economy
commandeers entire fleets again. In this recession, wire rope companies that are
focused on only one or two markets may find that they’ve hitched their cart to the wrong
horse. Or, if they have the misfortune to be located in a hard-hit region, there may be
few options other than a merger or sale if the recession lingers.
General economic data can be extrapolated, as well, to support either argument.
According to the latest data from merger and acquisition (M&A) bellwether, Dealogic,
M&A activity in the North American mid-market is down 22% from last year, with
numerous deals aborted at the last minute by the credit freeze. Even though we may
well soon see a buyer’s market of undervalued companies, only cash-rich or
creditworthy companies will be able to take advantage of the opportunities.
Yet, M&A activity will increase in the middle market as a result of the recession
according to Mitchell Ames, partner in the M&A practice at Pepper Hamilton, a New
York-based law firm. "The tightening of the credit markets and the resulting sharp
decline in high-leverage megadeals have shifted much of the M&A activity to
transactions with a value of under $500 million," and he adds, “the trend toward
smaller, easier-to-finance deals is likely to continue.” Also, unlike larger megadeals
that derive value from high leverage, mergers and acquisitions by small-to-medium
sized businesses are usually add-on transactions intended to drive growth, and most
are totally financed with equity, although it may be refinanced at a later date.
Nor can a third perspective be ignored. In a recent survey by SurePayroll, 40% of their
clients claimed no negative impact from the recession. Of those that had seen a
revenue drop, 70% said the drop was small. As with any financial forecast, expert
opinion varies widely on the depth and length of this recession, but most experts do
agree that small businesses, like those that comprise most of our industry, would be the
first to rebound. As banks slowly start making small loans, small businesses will be first
in line.
The stock answer is that time will tell. Obviously, a shorter recession will mean fewer
distressed companies. A longer recession might bring a wave of consolidation, and
even a second wave in some regions. Strong companies may seek to solidify their
regional powerbase, or they could grab this opportunity to expand geographically, or to
diversify into new market segments and product lines. Stable, but cash-strapped,
companies may opt to cut costs, even scale back operations, to ride out the recession
rather than accept a low buyout offer or unequal merger.
Yes, these are treacherous times, and even well-run companies may be caught up in
larger economic events, but still, it seems, the best-run companies will have seen this
coming. With cash in the bank, low debt, and a diversified product offering, will those
companies be looking at yours as a strong potential partner or as weakened prey in
2009?
Mergers and acquisitions increase in down economies – will you be a partner or prey in ’09?
If you haven’t heard, we’re in a recession. If you have heard, ignore the media
sensationalism. Anyone that’s been around a few decades recognizes this as a very
typical recession, with slower growth, higher unemployment, and tighter credit markets.
History says we should see a robust recovery within a year or two. However, history
also teaches us that some companies will not survive this downturn, and that others will
have to downsize considerably to make it.
Amazingly, we also learn the opposite is true. History is proof that many companies
thrive in tough times and consistently grow sales and profits. And invariably, a few
cash-rich companies will grow enormously in a recession – by merging with equally
strong partners and/or picking off beaten-down competitors at fire sale prices.
How will wire rope distributors and fabricators weather the current slowdown? In one
way, we are recession “resistant” because our products and services are used across
diverse industries. For instance, the construction vertical is slow now, but the energy
sector remains strong. And, while American wire rope manufacturers have lost out to
cheaper foreign steel, customers still require local service, so offshore fabricators are
not a viable threat. Instead, a stronger dollar and sagging global demand will lower our
steel costs even more.
On the other hand, the recession is hitting some regions and market segments harder.
Construction activity is slow in states with high foreclosure rates. Any manufacturer of
consumer products is seeing lower revenue. Land and air transportation companies
are logging fewer miles; however, lower fuel costs have eased their losses. The bubble
has burst for marine shippers, though, as it may be years before China’s economy
commandeers entire fleets again. In this recession, wire rope companies that are
focused on only one or two markets may find that they’ve hitched their cart to the wrong
horse. Or, if they have the misfortune to be located in a hard-hit region, there may be
few options other than a merger or sale if the recession lingers.
General economic data can be extrapolated, as well, to support either argument.
According to the latest data from merger and acquisition (M&A) bellwether, Dealogic,
M&A activity in the North American mid-market is down 22% from last year, with
numerous deals aborted at the last minute by the credit freeze. Even though we may
well soon see a buyer’s market of undervalued companies, only cash-rich or
creditworthy companies will be able to take advantage of the opportunities.
Yet, M&A activity will increase in the middle market as a result of the recession
according to Mitchell Ames, partner in the M&A practice at Pepper Hamilton, a New
York-based law firm. "The tightening of the credit markets and the resulting sharp
decline in high-leverage megadeals have shifted much of the M&A activity to
transactions with a value of under $500 million," and he adds, “the trend toward
smaller, easier-to-finance deals is likely to continue.” Also, unlike larger megadeals
that derive value from high leverage, mergers and acquisitions by small-to-medium
sized businesses are usually add-on transactions intended to drive growth, and most
are totally financed with equity, although it may be refinanced at a later date.
Nor can a third perspective be ignored. In a recent survey by SurePayroll, 40% of their
clients claimed no negative impact from the recession. Of those that had seen a
revenue drop, 70% said the drop was small. As with any financial forecast, expert
opinion varies widely on the depth and length of this recession, but most experts do
agree that small businesses, like those that comprise most of our industry, would be the
first to rebound. As banks slowly start making small loans, small businesses will be first
in line.
The stock answer is that time will tell. Obviously, a shorter recession will mean fewer
distressed companies. A longer recession might bring a wave of consolidation, and
even a second wave in some regions. Strong companies may seek to solidify their
regional powerbase, or they could grab this opportunity to expand geographically, or to
diversify into new market segments and product lines. Stable, but cash-strapped,
companies may opt to cut costs, even scale back operations, to ride out the recession
rather than accept a low buyout offer or unequal merger.
Yes, these are treacherous times, and even well-run companies may be caught up in
larger economic events, but still, it seems, the best-run companies will have seen this
coming. With cash in the bank, low debt, and a diversified product offering, will those
companies be looking at yours as a strong potential partner or as weakened prey in
2009?
Welcome to the Wire Rope Exchange.
The February 2009 issue will hit your mailbox in a few
days.
In the next issue:
Is Industry Consolidation Coming?
The February 2009 issue will hit your mailbox in a few
days.
In the next issue:
Is Industry Consolidation Coming?