Preparing for Mergers and Acquisitions: Interest Areas

Originally titled 'Preparing for Mergers and Acquisitions: Interest Areas'

Understanding the most intense mergers and acquisitions interest areas and the differences between processor and moldmaker, mergers and acquisitions will better prepare mold builders for the process.

Mergers and acquisitions (M&A) activity has had a great impact on plastics-related companies in North America for years. When these companies sell to private-equity funds or powerful strategic players eager for new business opportunities, company owners are given a mechanism for exit or retirement. Such transition nourishes the influx of new blood, ready capital and creative new approaches for growth.

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While all plastics processors have long been accustomed to buying and selling activity, the capital-intensive mold and tooling providers have experienced less M&A action because prior to the rising maturity and growth of North American mold and tooling, most tooling came from Europe or South America. M&A activity is now becoming stronger in the United States and Canada, as previously offshored product comes back to the region. This activity has prompted equity firms, original equipment manufacturers and injection molders to inquire about buying tooling vendors to capitalize on a critical, high-value industry and to better control mold sourcing or to internally add a mold source division, respectively. 

M&A activity is now becoming stronger in the United States and Canada, as previously offshored product comes back to the region.

The topic of preparing for mergers and acquisitions will be a four-part series that focuses on sharing tools and knowledge about how the world of plastics M&A work, so shops can be better prepared and remain healthier and stronger through the process. The series will identify the areas of most intense M&A interest, mechanisms to assess the likely M&A impact on a company, the sale process and successful transition to new ownership.

M&A Interest Areas 

As shop owners grow their companies, it is important that they understand which features offer premium value to potential buyers. One of the most impactful is industry expertise, especially in areas known to have steady growth. Such areas include medical products, medical packaging, aerospace products, pet products and food packaging. 

As shop owners grow their companies, it is important that they understand which features offer premium value to potential buyers.

Some buyers are so focused on industry specialization that they look only for target companies with a heavy and well-known concentration in a specific niche product. The Douglas Group has found that a company with a specific niche and a strong reputation can experience a 20- to 50-percent increase in transaction pricing. This is because buyers assume that the mold provider with exceptional expertise in a defined segment will command stronger pricing and better margins.

Some buyers are so focused on industry specialization that they look only for target companies with a heavy and well-known concentration in a specific niche product.

Capabilities with a wide range of materials also play a vital role in attracting buyers, as they demand much sought-after expertise. For example, plastic molds are made from materials like zinc, aluminum and steel. This requires capabilities that create access to special customers with thinner competition, which can be a strong basis for added value to a buyer. Additionally, any unique ability or tendency to improve reliability or precision will help salability and enhance value. Examples include specialty projects such as multi-cavity molds, insert molds, shuttle molds, silicone rubber handling, resin transfer molding and various prototype molds. 

Other key criteria beyond the basic industry expertise of a given company might include facilities. Specifically, a facility that may be of particular value to a buyer is a location within a specific geographic range that is being targeted or a location that houses a pre-identified capability that is necessary for substantial expansion. People, their skills and a company culture that closely aligns to key corporate cultural issues like continuous improvement initiatives matter. Efforts to enhance capabilities in applications that are slightly more difficult, more costly and more unique offer increased value and potential for greater long-term marketability, which in turn can improve profitability and make access to growth capital more certain. 

Processor M&A Versus Moldmaker M&A

In the world of plastics M&A, often-accepted “norms” for plastics processors apply differently to moldmakers, so it is important for both parties to understand the differences. For example, the Douglas Group works with injection molders with sales ranging from $25 million to several hundred-million dollars, and there are not many moldmakers who fit in that range. Often, the difference in sales makes it difficult for molders to appreciate the value of a much smaller supplier of an adjunct part. On top of that, an injection molder’s assessment of a moldmaker’s financial performance subjects the moldmaker to the “norms” of injection molding. For example, buyers looking for moldmaking capabilities commonly determine profitability as they do for buying and selling activity in injection molding. That is, they look for financial performance with earnings before interest, taxes, depreciation and amortization (EBITDA) that is strong enough to compare well with injection molding operations around the country. Companies with EBITDA of 7–13 percent of sales are considered average performers. Those with EBITDA in the high teens are perceived as great performers, commanding a higher acquisition price.

Companies with EBITDA of 7–13 percent of sales are considered average performers. Those with EBITDA in the high teens are perceived as great performers, commanding a higher acquisition price.

Speed of collection is another vital difference between processors and moldmakers that all parties must consider. Buyers inevitably look for strong cash flow and a solid balance-sheet performance. However, moldmakers commonly face customers that delay full payment for molds until the molds are in use and producing income. Buyers do not expect to add increased risk by accepting long delays in customer payments. This should be another consideration for the buyer who is assessing a moldmaking acquisition opportunity.

M&A activity in moldmaking can give companies a great boost toward available capital and financial resilience. In 2018, this series will continue to provide insight to help moldmakers better prepare for any M&A opportunities in their future. 

 

 

 

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