Plastics industry ripe for consolidation
Published: February 15th, 2013
Long known as a "fragmented" segment of the industrial supplier market, the plastics industry's—in particular processors and mold manufacturers—recent M&A activity is signaling that the industry is ripe for consolidation. Recent examples include Husky buying moldmaker KTW; Jabil buying Nypro; Milacron buying Mold-Masters; and Balda AG purchasing molding and moldmaking firms C. Brewer and HK Plastics Engineering.
There are likely several reasons for this sudden burst of M&A activity in the plastics industry. One is certainly the fact that many plastics and moldmaking companies are into the third and fourth generations of the family business. For those whose founder is still running the business, many of those who are in their 60s and 70s are trying to retire, primarily by selling the company to another entity who will keep it running.
The recession of the early 2000s, as well as the great recession of 2008-2009, resulted in the failure of the weakest molders and moldmakers. Those left standing tend to be the larger, stronger companies that have weathered the storm and gotten more financially stable due to an expanding customer base now that the smaller competitors have fallen by the wayside.
But there’s a limit to just how much growth and expansion even a large mold manufacturer or molder can finance on its own. In this industry, a "large" mold manufacturing company might generate somewhere between $50 million and $75 million in annual sales. Custom injection molding companies can grow to a size upwards of $200 million, but those are few and far between. And as we’ve seen over the past few years, those are the ones that have been acquired and merged into larger, OEM businesses.
There are a few things that matter when companies begin shopping for a molding or mold manufacturing company to buy:
Size matters: Yes, size matters because size tends to equate to the strength of a company. Not always, but a company that has grown to a considerable size in this industry—say $200 million in sales for a molder and $75 million in sales for a moldmaker—has done so because of good management, a good reputation in the markets it serves and among its customers, and optimum utilization of technology. It wasn’t by accident.
Technology matters: It’s important for a company to have invested in and maintained cutting edge utilization of technology as a competitive advantage. Any company can buy technology. But it takes good management, skills training of employees, and a dedication to optimizing technology (machinery, automation, software, etc.) to turn an investment in hard assets into real value for the company. Technology also provides a way for companies to vertically integrate into complementary capabilities and extend their reach to new customers.
Customers matter: A good customer base is also a critical factor that buyers look for when shopping for a processing or moldmaking company. A strong customer base has intrinsic value, and while there’s no guarantee that customers will stay with a supplier forever, it provides a solid foundation upon which to grow a business and continue to acquire new customers.
Markets matter: Entering new markets, either in terms of geography or a new industry sector, can sometimes be done faster through acquisition. A company that is entrenched in a specific market and has a good reputation, a solid and diverse customer base in that market or that region, and has the right size, technology and management, can be attractive to a larger company looking to become a player in that market.
Bobby Bono, U.S. industrial manufacturing leader and author of Pricewatershouse-Cooper’s latest edition of Assembly value, an analysis of mergers and acquisitions in the global industrial manufacturing industry, commented in PwC’s latest study that the “financial health of corporations and growth prospects in attractive niche product and geographic markets, along with continuous strengthening of the global manufacturing industry, resulted in an augmentation in the value of the deals in 2012.”
Bono added that divestitures were also a “major driver” of the activity, a trend that PwC expects to continue “as manufacturers adjust their portfolios in accordance with changing growth prospects." That was true of the acquisition by Balda AG of C. Brewer Company and HK Plastics Engineering Inc. According to Dr. Rolf Eilers, CEO of Balda Medical Group, the company had a “financial engagement” with TPK, a touchscreen producer. Balda sold its financial shares of that business and now has expanded its medical contract manufacturing by entering the U.S. market.
PwC’s report painted an interesting picture of both uncertainty and optimism. The uncertainty, noted Bono, came over the direction of the global economy, and the fourth quarter of 2012 saw a slowdown in announced transactions. Some European economies "slipped in a recession in 2012 due to the sovereign debt crisis." China seemed to manage to avoid a "hard landing" but “the growth of its economy and manufacturing sector remained choppy, and the risks of property meltdown and subdued exports remained.”
The United States contributed its fair share to the uncertainty that seemed to be pervasive during the last quarter. “The outcome and business demand, and tax implications of the presidential election and fiscal cliff . . . also possibly curbed the enthusiasm for deal-making in the last quarter of the year,” Bono said.
Despite the lackluster fourth quarter, Bono said that 2012 “proved to be a favorable year for transactions in the industrial manufacturing space. Year over year, the total number of the announced transactions was slightly lower but there was a substantial increase in the value of those deals.”
Geographically, North America led in industrial manufacturing M&A, “both in terms of the total deal number and the total value of the announced transactions.” This uptick in what Bono calls the “mega-deals” was a contributing factor in the growth in total deal values. Despite experiencing tepid growth in 2012, “the U.S. economic resilience and strengthening of its industrial manufacturing sector spurred M&A interest.”
While there remains a level of uncertainty in the pace of economic recovery globally, Bono noted that “strong cash reserves and a rebound in the manufacturing sectors of many nations provide hope for continuation of the recovery in the industrial manufacturing deal activity.”
So, for processors and mold manufacturers who are thinking about selling their businesses, now just might be a good time to begin that process.