rss icon

Sunday, 24 January 2016 22:54

Manufacturers turn to M&A to fill void in capacity

Written by 
Rate this item
(2 votes)

After running as lean as possible in the years following the recession, West Michigan manufacturers are embracing acquisitions as a strategy to add capacity and meet customer demand.

That was the case for Grand Rapids-based Mill Steel Co. when it acquired certain assets of S&S Steel Services Inc. of Anderson, Ind. after the company fell into bankruptcy as a result of a tumultuous steel market and excess inventory.

“This is as much a capacity issue as anything else,” said Mill Steel CFO Eric Lambert. “We’ve addressed some capacity issues we’ve had for our business as a function of this acquisition.”

The new facility will add 215,000 square feet to Mill Steel’s overall footprint along with a variety of steel slitting equipment and other machinery, Lambert said.

Most importantly, Mill Steel plans to migrate some of the processing capabilities and distribution activity from its facility at the Port of Indiana to the former S&S Steel facility in Anderson.

“We’re reviving a business that’s been removed from the marketplace for a brief period of time, but we’re looking forward to getting it back up and running again,” Lambert said.

Terms of the deal were not disclosed.

Mill Steel’s acquisition of S&S Steel Services underscores the larger M&A climate in West Michigan and elsewhere in which manufacturers are acquiring other firms to increase their capacity, said John Kerschen, managing director of Charter Capital Partners, a Grand Rapids-based M&A firm and investment bank.

“We’ve seen acquisitions that are capacity-related (because) we’ve had a pretty good stretch here in the economy and some suppliers have needed to keep up with their customers,” Kerschen said. “Those may be things like international expansion, new automation and technology — and those are big expenditures.”

On the other hand, as some executives grapple with a lack of capacity in their operations, it’s encouraged them to sell, Kerschen said.

“We’ve also seen some deals where a seller may not want to sell but may not have the capability to follow their customers,” he said.

Global deal activity remained strong in the third quarter of 2015, according to the latest data available from an analysis of industrial equipment manufacturer M&A from PricewaterhouseCoopers LLP.

The U.S. share of global deals did dip to its lowest levels in a decade, but the report’s authors note that a strong U.S. dollar could increase the number of outbound deals in the coming months.

In North America, 115 deals valued at more than $50 million occurred in the third quarter of 2015, bringing year-to-date deal volume to 333, according to the report. Total deal value reached nearly $24.5 billion over the same time frame.

The report’s authors remain optimistic that deals will continue at a brisk pace into 2016.

Both Kerschen and Lambert echo those sentiments and attribute the trend to a need to boost capacity.

“A lot of our customers are at-capacity and stretched, so you see a lot of that consolidation of capacity taking place right now,” Lambert said. “I sense that a lot of people are trying to evaluate and find the same opportunities.”


SELLER’S MARKET ERODING

While most M&A advisers say it’s still largely a seller’s market, Kerschen questions how long this period of high valuations will continue to last.

Multiples have trended upward since the recession because of available cheap credit, Kerschen said. Deals for tech-heavy manufacturers regularly fetch upwards of 10 times earnings before interest, taxes, depreciation and amortization (EBITDA), he said.

However, valuations could take a step back given signs of volatility, Kerschen said, citing the sluggish stock market over the last month and ever-present international uncertainty.

“We have some sense that valuations might be leveling off or coming down a little bit,” Kerschen said. “It is a very good environment out there, but even some of the buyers will tell you that it’s not sustainable.”

For would-be sellers, Kerschen advocates that there is no time like the present to strike a deal.

“What keeps me up at night is that we’re going to go back to a time when a company who could have gotten a 10 is only going to get a 6 or 7,” Kerschen said of EBITDA multiples. “That’s not going to feel very good, so they’re not going to want to do deals for a while.”

Read 2001 times Last modified on Sunday, 24 January 2016 21:14

Breaking News

September 2018
S M T W T F S
26 27 28 29 30 31 1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 1 2 3 4 5 6

Follow MiBiz