Mergers & Acquisitions

The M&A market is regaining vitality, with transactions on the rise in a continuing shakeout of the old plastics order. Are you buying, selling, working on a succession plan, or considering a joint venture overseas? Modern Plastics editors report on the market and how to assess your position.

Plastics M&A activity is on fertile ground

Strong growth is projected for the processor segment as acquirers seek to get bigger and better.

In the novel, "The Lady, or the Tiger," a prisoner''s survival depends on what lurks behind one of two doors he chooses to open. A similar fate awaits many plastics processors beaten up by rising costs, overcapacity, and weak demand, analysts say. Whether these molders grow or die depends largely on their ability to serve as prime acquisition targets or strategic buyers.

The use of mergers and acquisitions (M&As) as a core business strategy has become prevalent in the processing sector. Acquirers seek, among other things, to enhance their size, scale, and low-cost position; maintain emphasis on globalization; broaden and improve customer, industry, and geographic sales mix; and obtain a broad range of product, service, and process capabilities.

Movin'' on up

"Virtually all [processing] sectors experienced significant transaction volume increases driven by activity among financial and strategic participants," observes Thomas Blaige, CEO and managing partner of Thomas Blaige & Co. (Chicago), a firm that focuses on plastics industry transactions. "The numbers indicate that clear sector leaders are transforming themselves by using divestitures as well as acquisitions."

The plastics industry M&A market is considered fertile ground, as evidenced by the 366 transactions made last year, up from 198 in 2002, according to Blaige. The injection molding community registered 80 deals in 2003, up 39% over the previous year and accounting for 22% of overall deal volume.

"Corporate spinoffs, OEM outsourcing divestitures, bank-driven sales, and signs that entrepreneurs are beginning to return to the market, together lifted volume," Blaige says.

While the IM sector posted the second-largest number of deals overall, it accounts for a declining proportion of M&A activity. That''s because consolidation activity is in full swing among the other five major processing operations: film and sheet; pipe, profile and tube (PP&T) extrusion; blowmolding; thermoforming; and rotational molding. "Last year there was a lot of M&A activity involving mostly smaller transactions that were not strategized," Blaige notes.

An estimated 40% of injection molder deals involved cross-border activity, as larger strategic players pruned non-core operations and expanded into target markets. While a strong euro peaked the interest of European companies in North American processors, the reasoning goes far beyond financial.

"A European company needs to follow their large OEM customers overseas," says Jocelyn Bertheau, a partner at Canec International Ltd. (Toronto and Paris), a transatlantic M&A advisor. Most of this M&A interest from Europe is from industry buyers, he adds.

Historically, injection molding has been one of the most actively consolidating sectors. Analysts do not expect activity to ease up in 2004, as improving economic conditions are driving larger corporate profits and stock prices along with greater corporate confidence, considered ideal conditions for M&A activity. Preferred markets for interested acquirers of injection molders include building products, personal care, medical, packaging, and caps and closures.

Who''s buying?

Armed with cash and ready to buy, private equity firms are expected to be a strong force in the U.S. M&A market. According to Blaige, private equity add-on and platform acquisitions and MBOs were pervasive in the injection molding business, with financial buyers accounting for roughly 25% of activity, about double the proportion of deals in 2002.

"The strategic corporate buyers are back, having recovered from some of the acquisition indigestion they suffered in recent years, and feeling generally greater optimism for the future," says Debbie Douglas, founder and managing director of the Douglas Group (St. Louis, MO), a private investment banking firm representing business owners in the sale and purchase of businesses.

By comparison, high energy and raw-material costs are hampering smaller processors from funding deals, analysts say, but some will still put their toes in the water and consider deals that make sense. A recent increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples may also keep processors on the sidelines.

"Mid-market players have looked to the private equity community for partners to fund growth so as to develop global capabilities for their global customers," Blaige says.

But that is not to say plastics have been upgraded from "buyer beware" status, coming on the heels of a three-year manufacturing recession. Sellers must stand on their own history and position to remain prime targets, experts say.

The right attributes

"Plastics 10 to 15 years ago were in a favored category, often automatically viewed as strong and stable," Douglas says. "Today, that is not the presumption. Almost every lender has faced at least a few troubled plastics processors in its portfolio, and they are aware of and look for the pressures on margins and the competition from foreign sourcing."

Robert W. Baird & Co. (Chicago), an international wealth management, investment banking, asset management, and private equity firm, estimates plastics industry transactions ranged between $9.5 billion and $21.3 billion globally, and between $11.3 million and $46.8 million in the U.S. during the past 10 years. Although current selling prices remain below pre-9/11 levels, processors with a solid history of profit continue to command a premium, says Steven Bernard, director of M&A research.

"If a processor is substantially overcapacity now, and their prospects are dimming because of margin pressure and customers demanding more global business, these molders aren''t as important."

Strong value-added niche operations, in particular, are in demand. "The presence of an especially strong reputation in one particular area is mentioned as a key acquisition search criteria by three out of four buyers today," Douglas says. "It''s perceived to protect margins and offer barriers to competition."

The $134-billion U.S. plastics processing segment, like the rest of the industry, is in an embryonic stage of consolidation. The shakeout will create fewer players who are significantly larger, possess stronger capabilities, and maintain a global presence.

"Now that we have seen improvement in the economy and prospects for a better economy for this year, and earnings are increasing," Bernard says, "I think you will see a lot more companies consider acquisitions."—GV

A packaging empire

A serial acquirer, Berry Plastics has averaged better than one deal a year for the last 12 years. And like the Roman Empire, the most acquisitive organization of its time, Berry strives to absorb the best practices of its new businesses, growing not just in size and reach, but in skills, too.

As the seas of any market become rough, and smaller companies take on water, they face a stark choice: succumb to the turbulent business climate and sink, or hitch your vessel to a larger ship—surrendering some command, but living to do business another day.

This is especially true of the recent business climate for plastics processors, with many smaller companies being overwhelmed or latching on to larger firms, one of the biggest of which, Berry Plastics Corp. (Evansville, IN), has endured and is navigating the punishing waters with an ever larger fleet.

"There are many people in the plastics industry that want to tie their boat to Berry Plastics," President and CEO Ira Boots says, "and we''re in a privileged position to have that happen."

With ownership associates Goldman Sachs Capital Partners 2000 LP and JPMorgan Partners Global Investment Fund providing financial acumen and deep pockets, Berry has capitalized on its opportunities, racking up 19 acquisitions in the last 12 years, growing to 15 North American locations (18 globally) and proforma revenues of $747 million after the third quarter of 2003.

Boots has been there all along, joining the company''s tool shop from his father''s in 1978, working through various management positions, becoming COO in 2000, and CEO shortly thereafter. The company, which was founded in 1964, only had revenues of $5 million when Boots was hired on to the moldmaking operation, but not everything has changed since then. Personnel-wise, much of what Boots calls the "nucleus" is still in place, and the company remains wholly focused on packaging.

"[Packaging] is where our expertise really lies," Berry explains. "For us to diversify into automotive, appliances, or maybe some other area really just doesn''t make a lot of sense. To be competitive, we have to continue to consolidate, and fortunately, there is a very large universe of companies that are potential acquisitions for Berry."

Friends in the investment banking industry

Financial owners not only provide capital to move on potential purchases, they also offer market research and exhaustive due diligence for Berry to make informed decisions. Boots says the company''s goal is continuous growth: for the leverage it offers in purchasing, for the price discounts, for geographic proximity, and for the economies of scale.

"Our customers are demanding larger companies to supply them with many more products and have much reduced pricing," Boots points out, adding that Berry can offer discounts of 5% to 10% over standalone shops. "The economies of scale for a larger company are generally more favorable than for a smaller, individual company trying to go out on its own."

Berry''s annual benchmark is for 50% organic or internal growth, with the other half to come from acquisitions or inorganic growth.

"You have to feed new life into your company," Boots says, "and the acquisitions bring in new customers—and new product lines in some cases—and those can be fed throughout the base company to our existing customer base, providing new life as we''re going forward."

Valuation evaluation

As it decides what to pay, Berry largely ignores wider valuations trends, like the precipitous pricing decline from the late ''90s apex. Boots says Berry is not a market timer, and a strong acquisition is often a strong one at almost any price.

"When a good company becomes available that is in our strike zone—where we want to be—we are an active suitor for that business," Boots says of Berry''s philosophy. "What we''re looking for is not so much what we''ll have to pay, although, obviously, that''s important, but what synergies we can derive from the deal, and whether we can make them a positive contributor to the valuation of our company."

In terms of valuation and price, Boots says in the past, prices have run anywhere from three times the target company''s earnings before interest, taxes, depreciation, and amortization (EBITDA) to as much as 7.25 times EBITDA.

No division is an island unto itself

Once a price has been agreed on and a deal made, Boots says the most important work begins. Like most successful M&A players, Berry moves quickly to integrate sales, IT, product development, human resources, management, and operations. But as it does so, it doesn''t automatically overlook what may be sound operational strategies already in place at its acquisitions.

"You have to fully integrate the acquisition," Boots says. "You can''t have a company of many different islands. We go to the plant floor and educate new companies in the Berry program.

"But at the same time, we look for their best practices—things that they''re doing better than the base company. We''ve had 19 acquisitions, and every one of those companies has had some best practices," Boots says.

Many of those practices center on packaging, the application upon which Berry has chosen to build its foundation. From that base, it builds out strategically, remaining focused.

"You have to have a platform-based company" Boots insists. "You have to have core competencies that you''re very good at, that you can build your company around. You can go out and make acquisitions that bolt on and continue to grow that platform."

Already formidable, Berry''s platform is still poised for smart growth, according to Boots. "We have a lot of opportunities to continue to do what we''re doing," Boots says, "and we think we''re still in the embryonic stages of where Berry is going."—TD

Selling doesn''t have to mean selling out

It is often hard for an entrepreneur to develop an exit strategy that guarantees the future of his firm and its employees. Equity investors are more interested in the money than the people, while a competitor may just be looking to take a rival out of the market. It doesn''t have to be that way.

Hans-Gert Mayrose is a director at equity investor Gesco in Wuppertal, Germany. The firm acquires small-to-medium-sized enterprises (SMEs) in Germany involved in plastics processing or machine manufacturing, and holds them for 10 years or more.

"There are many financial investors who buy and sell firms to make a profit, and usually this involves making rapid, drastic changes to the acquired firms," he says. "We aren''t trying to make our money from the exit. Sales that don''t hurt the underlying firm—that''s important to us."

Apparently it is important to many entrepreneurs as well. He says the firm is swamped with offers. "When we eventually do sell, we want to sell into good hands that will take care of the firm." He calls it "Engagement auf Dauer," German for "staying engaged for the long haul."

Gesco''s strategy has pleased its shareholders; the firm''s stock price has doubled in the last year. Gesco''s profits are the sum of the profits of the (now 12) firms it owns.

Because of the many offers it has, Gesco sees no need yet to look outside Germany. Plus, Mayrose says, "We know German law well so we can do due diligence at a relatively low cost using our own resources." Often the cost of due diligence, if outsourced, can be high enough to dissuade many buyers from even looking at a potential SME acquisition, he notes.

Succession progression

"Often we are approached by a business owner after his bank realizes he has no succession plan, since this raises the risk for the bank''s loans," explains Mayrose. He sees a positive trend among SME owners in planning for succession. "There are fewer problems with owners dying without a successor, or owners over 70 approaching us to sell their firms." Industry consultants and word-of-mouth also point processors to Gesco.

In the case of most SME processors, the owner is also the managing director. One sticking point during negotiations can be price, since few SME owners have a solid idea of what their business is actually worth.

"To whom can they talk? Their best sources of information would be the competition, and they cannot talk to them . . . SME owners often don''t have many people that they can speak openly with," Mayrose explains. Not surprisingly, most lack experience selling a firm "since they usually only get to do it once in their lives."

If the business is attractive for Gesco, the owner is asked to stay on after the acquisition and help find and train a new managing director, though Gesco ensures that the overlap is kept short. "There is nothing to gain by having two bosses, one established and one new, running a firm," Mayrose says. The new manager, after a two- to three-year probation period, is asked to take at least a 10% to 20% stake in the firm, with Gesco offering loans to managers without the necessary funds.

Most of the firms that Gesco acquires share some traits, says Mayrose. Foremost is a well-developed secondary management level, noting that in many SMEs the owner/director is also the best salesperson and key technical mind.

"Once we buy his firm and he leaves, is there still enough knowledge left in the firm for it to survive?" he asks. "If somebody else there is an excellent salesperson, everything looks much better to us."

Finances should be transparent and the owner should know which contracts are profitable and which aren''t, but this often isn''t the case, he says. A broad customer base is also critical, Mayrose says. "If one customer accounts for 40% of sales, I have to question if this firm is worthwhile as a long-term investment."

Gesco also takes great interest in processors that go beyond contract processing and have their own products to sell. One reason Gesco acquired AstroPlast (Sundern, Germany) in 1995 was that more than half its revenues were reaped from sales of its own products, such as spools for sensitive cables and wires. "This lessens dependence on other customers," he explains.

Gesco lets its managers run daily operations but insists on a meeting every six weeks to discuss marketing and strategy. "We offer them the sparring partner that entrepreneurs often never have," notes Mayrose.—BC

When succession is not a success: The challenge of passing on family business

"Approximately one third of European enterprises will need to be transferred to the next generation in the coming 10 years. This means that an average of 610,000 small and medium-sized enterprises (SMEs) will be changing hands each year, potentially affecting 2.4 million jobs."

So begins the introduction to a recent European Commission "good practice guide" of measures for supporting the transfer of businesses to new ownership.

The German Frankfurter Allgemeine Zeitung newspaper recently noted that some 2000 companies go out of business every year in Germany alone because the problem of who takes over after the founder steps down or dies has not been previously addressed.

And it says the problem is getting worse. "The center for Mittelstand [SME] research, IFM, in Bonn, calculates that around 355,000 family-owned companies in this country are facing a change of ownership in the next five years," it reports. There are no data specifically on plastics processors, but they undoubtedly make up an important proportion of these numbers.

One of the reasons so many SMEs hit the skids, says the FAZ, is that many owners die or fall seriously ill unexpectedly. Plus, many founders consider themselves irreplaceable. Many times, looking to the second generation is not the answer, since sons and daughters are often unsuited to the job.

In fact, as EIM Business and Policy Research, which studies SMEs in Zoetermeer, the Netherlands, notes, the number of parent-to-child business transfers that take place in SMEs in that country is swiftly declining and is now down to one in three.

Joris Meijaard, author of an EIM report on succession in SMEs, says 6% of Dutch SMEs are currently in the process of transferring their businesses. "Probably one third of the firms fail to find a successor, nor are able to sell the company," he says. "One in eight of these business owners expects to take more than five years to try to find a successor. Only 15% of the business transfers that actually take place have a formal succession plan."

For those entrepreneurs loath to let go of their own company, he also notes, "60% of the owners stay involved in the firm in one way or another, mostly as an advisor."—MD

M&A not the only way in Asia

Cultural and market diversity often make joint ventures a wise option.

In Asia, challenges associated with integrating diverse cultures and business methods across national borders are one reason why M&A is not as common as in the U.S. One successful example, however, was built on a long-standing existing business relationship.

The Tech Group (Scottsdale, AZ), a custom molder serving the medical and consumer industries, traditionally maintained close business and working relationships with Singaporean processor and toolmaker Omni Mold, and their relationship was cemented in October 2003 through the merger of The Tech Group Singapore with Omni Mold. The Tech Group currently has a 47.2% stake in the merged entity—called Tech Group Asia Ltd.

Due to the prior business relationships, integration of the merger partners in areas such as sales and marketing, product design, corporate business development, and operations has reportedly proceeded smoothly.

Tech Group has operations in Singapore, the Philippines, and China. In terms of M&A strategy, Tech Group Asia takes a flexible approach. If it makes more sense to construct a greenfield plant, this option will be taken. Construction of a new 450,000-sq-ft manufacturing facility in Zhuhai town, Guangdong Province, China, for example, is on schedule to be completed by August 2004. The firm is always on the lookout, however, for acquisition opportunities if it sees the right fit.

In North America, The Tech Group is open to a number of possible options to grow its business, according to CEO Harold Faig. "These range from outright acquisitions to special outsourcing arrangements.

"Companies in the medical device sector in particular are looking to reduce their manufacturing focus in plastics and concentrate on development and marketing," says Faig. "This opens up opportunities to acquire manufacturing operations outright, or possibly just the manufacturing equipment together with a supply contract."

Last year, The Tech Group acquired manufacturing assets from a California-based healthcare firm and transferred them to its Scottsdale plant. Prior to that, in December of 2000, it purchased a manufacturing facility in Grand Rapids, MI from Medtronic Inc. (Minneapolis, MN), and at the same time signed a six-year supply agreement.

In effect, firms are outsourcing their plastics component requirements through such deals, and in some cases, they are outsourcing complete packages, including device assembly. Here multicomponent molding technology can come into play.

JV or subsidiary in China?

Rather than pursue an acquisition, MBA Polymers Inc. (Richmond, CA) opted for a joint venture for its plastics recycling business in China (see March 2004 MP/MPI), essentially an unknown quantity to the firm.

"We wanted a JV partner for local knowledge, contacts, and know-how—especially in a country with such a different language and culture from ours—while we wanted someone to help us with the equity and debt financing," says CEO Mike Biddle.

Any old company won''t do, however. "First you have to look at partners that make sense, then find ones within that universe that are as excited about the business opportunity as you." They should also bring complementary skills to the table and be financially strong. Location of the prospective partner is also paramount in China (See February 2003 MP/MPI).

China has seen some M&A activity, mainly involving foreign firms acquiring assets of other foreign players.

Asahi Kasei Corp., for example, bought out its Japanese trading-house partner, compounder Wuxian Hamasaki Plastics Compounds Co. (Wuxian, China), as part of its move to establish an independent global compounding network in 2002.

In 2003, Idemitsu Petrochemical acquired a stake in Japanese compounder Shenzhen Stella Plastics Co. (Guangdong Province) as a means of entering the Chinese PC and PP market.

Back in 2001, custom molder Nypro (Clinton, MA) purchased two injection molding operations in China from electronic manufacturing services (EMS) provider Jabil Circuit Inc. (St. Petersburg, FL). A Nypro company spokesman says that in Asia, it is customary for the firm to first enter a market via a joint venture. In Thailand, for example, it set up a custom molding joint venture with Singapore''s Avaplas.

Global EMS providers like Flextronics (Singapore) have often grown through mergers and acquisitions, including acquisitions of processors. Valerie Kurniawan, marketing and communications director for Asia at Flextronics, says the scale of the acquisition is not necessarily a key factor when integrating a new operation like Singapore moldmaker Li Xin into the multibillion-dollar multinational. "The key is to merge the culture, and integrate the technology and the expertise of the acquired company," she says.

Several merits of doing M&A that she cites include the reduced capital investment in purchasing an existing operation when compared to organic growth involving the birth pains of starting a business from scratch (bringing in new customers, finding and hiring the right expertise, putting in place operational systems, equipping the facility, and so on). "Our acquisitions were on the premise of expanding our capabilities, filling a void in our arsenal, or increasing our capacity to meet market demands," she adds. -SM

Get bigger or get acquired

The plastics processing industry seems to have little room for standalone, independent shops lately, as overcapacity becomes the primary impetus for consolidation, and entry into the game demands economies of scale

In business for more than 30 years with revenues of $40 million, Precise Technology Inc. (North Versailles, PA) in 1996 was by all reasonable measures a successful molding operation. But they weren''t, as President and COO Mike Farrell points out, a "player."

That year, however, the company acquired the custom molder Tredegar, tripling its size as well as relative opportunities and challenges. Three more acquisitions followed, including the October 2002 bankruptcy purchase of Courtesy Corp. (Buffalo Grove, IL) for $130 million, which eventually removed any target from Precise''s back and put its corporate destiny in its own hands.

"Courtesy and Tredegar took us to $300 million," Farrell explains, "and as a $300-million molder, now you become a player in the industry. You can attract larger customers, and you can take advantage of synergies, leverages, plant rationalizations, and so forth. That''s the rationale [for expanding], really. You''ve got to be a larger player in the plastics industry right now. The smaller molders are either selling out or going out of business, and the larger molders are becoming bigger."

With 2003 top-line revenues at that $300 million level, Precise is in a position to capitalize on low industry-wide capacity utilization levels that demand further consolidation. Loosening purse strings at financial institutions mean that cash will be injected into the marketplace. Using the Courtesy acquisition as a model, Precise brings capital and its M&A philosophy to the negotiation table.

Target assessment

Quality, not quantity, is the overriding factor when purchasing a company, and Precise has a fairly specific profile for any potential target. Since it was purchased in 2002 by Code Hennessy & Simmons LLC, Precise has considered more than 40 companies for acquisition, but only signed off on one—Courtesy.

"I''d have to say," Farrell explains, "if we looked at any company that we would want to add on in the industry at that time, it was absolutely Courtesy."

The primary appeal was a shared market focus, with Courtesy serving the same sectors of healthcare, consumer products, and personal care. Farrell admits that Precise is "deathly against" the electronics and automotive markets, and Courtesy was devoid of customers in those areas. Like Precise, it was more focused on core markets rather than trying to be everything to every customer.

"When we do acquisitions," Farrell says, "they will either be to support one of our major customers in a different geographic location, or it will be an opportunity to expand our presence in a market we''re already doing business in."

Although Precise and Courtesy targeted similar markets, there was very little overlap in the two companies'' client lists, and now, no single customer represents more than 12% of Precise''s business, insulating it from over-dependence on any one partner.

A house divided cannot stand

Bringing on another company involves quite a bit more than changing the stationery, as Precise can attest, admitting it took almost two years to completely integrate Courtesy. Not only was it forced to assess all of the acquisition''s capabilities, but Precise also had to reexamine itself, find redundancies, and eliminate them. In the end, the acquisition doubled Precise''s size, but not before it closed operations on both sides. Courtesy''s rapid prototyping FastTrack was moved from Geneva, WI into its Buffalo Grove plant, and Precise shuttered molding plants in Massachusetts and outside Chicago, as well as the Precise Massie, St. Petersburg, FL moldmaking operation, shifting the work and some of the equipment to other facilities.

Much of this assessment was handled by an integration team whose members were drawn from all disciplines at Precise and were wholly focused on bringing Courtesy into the fold.

Farrell separates this integration into several categories, including plant and work-force rationalizations, purchasing synergies, and sales and marketing cooperation. Precise moved fast to make Courtesy fit its template, covering everything from shop-floor operations to ERP systems. But its first step was to remove Courtesy''s executive management.

"In the early stages of the diligence," Farrell says, "we assess who we need as far as the management is concerned, and quite frankly, in most strategic acquisitions, the upper management of the acquired company very rarely stays." This was especially true in the case of Courtesy, whose previous owners had brought in a management company that had no experience in the molding industry to run the business.

"You have to get in early and assess the company you''re buying and how it''s going to fit in with the organization and culture that you currently have," Farrell explains. "You cannot keep two companies running simultaneously for any given period of time. To be successful, to integrate properly, you have to become one company as quickly as possible."—TD"Courtesy."

The primary appeal was a shared market focus, with Courtesy serving the same sectors of healthcare, consumer products, and personal care. Farrell admits that Precise is "deathly against" the electronics and automotive markets, and Courtesy was devoid of customers in those areas. Like Precise, it was more focused on core markets rather than trying to be everything to every customer.

"When we do acquisitions," Farrell says, "they will either be to support one of our major customers in a different geographic location, or it will be an opportunity to expand our pre

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