Playing the acquisitions game: The advantages and pitfalls of a fragmented industry

Drawn by the lure of multiple markets, buyers with financial and strategic goals have found success and failure in this appealing industry.

It’s been said by more than one astute buyer that one of the most attractive features about the plastics industry is its fragmentation. Greg Botner, president and CEO of Titan Plastics Group Inc. (Portage, MI), noted that in 1995, when the company purchased Wollen Products, the main attraction was the fragmentation of the plastics molding industry.

“We created a company with a balanced customer portfolio because the fragmentation let us pick and choose the companies we needed to serve the markets we wanted,” said Botner, a panelist at Plastics News’ Executive Forum in January. “We were able to separate ourselves from the competition by choosing customers that needed our expertise and regional presence.”

Fragmentation of the molding industry has proven that it can work either in a purchaser’s favor or against it. While it can be good for the strategic buyer, it contains more pitfalls for the financial buyer. Fragmentation in the molding industry has kept the majority of companies in the small to medium size range, with only a few very large companies dominating the top. It has divided up the molding pie among so many players that few molders managed to gain any significant chunk of the available work. Therefore, it takes a lot of small chunks to create a large enough company to sustain its growth.

What Doesn’t Work
Arguably, the barriers to entry into the custom injection molding business are not huge, making it an attractive “investment” opportunity. However, these investments haven’t been a smooth road for those who came into the game during the late 1990s. The features that made the custom injection molding business seem like a winner soon faded.

A few buyers came on to the scene looking to cobble together a dozen smaller companies to create a single, powerhouse molding company, known as a “rollup.” Most of the time, that didn’t work. A consultant for one financial firm that focuses on plastics industry deals, and who did not wish to be identified, readily agrees that the vast majority of rollups have not been successful. “[These companies] have struggled with the rollup platforms for a lot of different reasons,” he says.

Some buyers got hurt on timing. Multiples were very high in the late 1990s, and a lot of private equity firms overpaid, followed by the economic downturn—all of which took its toll. Some have experienced the offshore phenomena of Mexico and China. Botner told of one firm that purchased a molding company only to learn that the primary OEM customer had already planned to pull the work to Mexico.

Botner sympathizes with that. “When looking at an acquisition, you have to look at the customers’ manufacturing strategies to help define what your acquisition strategy should be,” he stated. “What will stay here and what will go offshore?”

Integrate the Management Team
Of course, not all financial purchases have failed. Berry Plastics has been a huge success story, notes the financial consultant. It’s been in private equity hands for a number of years. First Atlantic sold the company last year to Goldman Sachs. “They just have a great management team that knows how to integrate,” he explains.

This integration is key, Botner notes. Buyers can struggle with integration, a result of the fragmentation. That’s partially a function of the management team in place. Botner noted the pitfalls of integration, one of the biggest of which is lack of focus on both your own management team and that of the acquired company.

“Assess the management team of the acquired company and see where they’ll fit,” he advises. “Communicate with the acquired company your goals and expectations. It creates a program expectation right out of the chute.”

Botner adds that “right away we get them focused on what they need to do as well as how they fit in. Define the structure, find the players who fit, and develop the model. Change signals, break up old paradigms, and align with new ones of the new parent organization. And if you can’t change the people, then change the people.”

The Facts
Whether or not fragmentation has proved to be a beneficial quality in a prospective acquisition, it’s still a favorite feature among both financial and strategic buyers. A July 22, 2000 report on the plastics industry by analysts at U.S. Bancorp Piper Jaffray noted that most buyers liked the fragmentation of the plastics industry.

For instance, Notre Capital Ventures of Houston, TX put together several custom molders for a total of 19 plants in Indiana, Tennessee, Missouri, Arkansas, South Carolina, Louisiana, and Georgia. One of the things Notre looks for, the report notes, is an industry that is “highly fragmented” in which there is no established dominant competitor.

Aurora Capital Group, which created United Plastics Group, also likes fragmentation in a competitor base in addition to “stable demand and potential for capacity reduction, offering opportunities for consolidation and earnings improvement,” the Piper Jaffray report says.

Who Comes Out on Top
Which strategies have worked better: the financial and big investment buyers, or the strategic buyers such as Titan? Both have their place in the acquisition arena. Typically, financial buyers are looking for the deal—an opportunity to buy low, add some value at not too much cost, and sell high. On the sell side of the business, says our anonymous consultant, financial sponsors or private equity firms tend historically to be “financial guys” who leverage up the business that drives a large part of the returns.

For strategic buyers and sellers, fragmentation in the molding business has helped these transactions because strategic buyers typically will pay more for a business. Often that’s because there are greater synergies. “The map doesn’t work the same for financial guys as it does for the strategic buyers,” this consultant notes. “Obviously, financial players don’t come to it with as much of a strategic angle, unless they already own a molder.”

Although strategic buyers tend to be more successful in a fragmented industry, they still have to be careful. Titan’s Botner told of one acquisition that was “a disaster.” It occurred because the company lost its strategic purpose and failed to conduct proper due diligence. “We basically acquired a business in a market we had no business being in,” he said.