Sixteen Case
Studies On Lean
Manufacturing
From Manufacturing &
Technology News
BY PATRICK WINTERS
Earlier last year, a mid-sized manufacturing company was at a crossroads. The company’s owner was thinking about retirement. The business was changing. Customers were starting to buy from larger, "one-stop" suppliers that could provide a wider variety of products and services.
The owner knew the company could try to compete in this changing environment, which would require added capital and significant changes to the business -- or sell the business. Weighing all factors, he decided to sell to one of the industry’s consolidators -- a multi-million-dollar public company. This company had strong stock valuation and offered favorable pricing and a good strategic fit.
Today, there is an unprecedented alignment of industry, economic, tax and accounting factors that are creating what may be a once-in-a-lifetime seller’s market. These factors include:
- High public company valuations. As the historic highs of today’s stock market continue, public companies with high valuations enjoy access to cheaper capital with which to make acquisitions. Moreover, many of these companies are in "acquisition mode" to achieve the earnings growth required to justify such high valuations. The result has been a buying spree -- more than 7,000 acquisitions through the first nine months of 1999, almost a third of which involved deals valued below $100 million.
- The global economy. The strong U.S. market continues to attract foreign investment from companies overseas. Many foreign corporations have determined that the best way to enter U.S. markets is through the acquisition of existing companies. Moreover, as European and other foreign economies continue to improve, these companies achieve increased wherewithal and capital to expand into U.S. markets.
- Consolidation. Consolidation in manufacturing is creating excellent opportunities for middle-market companies to sell. Consolidation is being fueled by customers who want fewer, larger suppliers that offer favorable pricing, financial stability and greater distribution reach. Larger companies are able to make investments in technology that smaller companies cannot amortize over their business base. Thus, consolidation also carries the threat that it’s going to become increasingly difficult for smaller companies to compete with mega-companies.
- Proposed end to pooling of interests. The potential elimination of the pooling of interest accounting method this year is giving buyers added incentive to make acquisitions over the next 12 months. The method is favorable for transactions because it allows companies to account for acquisitions as though buyers and sellers were always part of the same company, thus eliminating added depreciation expense and amortization of goodwill.
- Capital gains cuts. Capital gains cuts that became effective in 1998 can save sellers hundreds of thousands of dollars in taxes on a sale.
Business Issues. Of course, it’s one thing for the climate to be generally favorable for selling -- and another for selling to be possible and desirable for the owner of the business. If business issues are driving an owner’s thoughts about selling, the following types of questions need to be answered:
How’s business? Is the business growing? Is it being threatened? How? For example, did your biggest customer just leave you for a larger competitor? Why? Did the competitor offer favorable pricing, improved technology, broader distribution?
Do you want to mimic the leaders by making similar capital investments and/or becoming a consolidator yourself? Or do you want to exit the business? Would you prefer a transaction that allows you to realize liquidity now but remain active with the business or in the industry?
Owners who want to stay in the business and compete but are near retirement age must consider whether the wealth they have built up in the company is now under risk due to the new competitive climate. Technology is moving quickly and companies that do not keep up risk destroying a lot of value.
Owners thinking about cashing out will be asked if they want to get out of the business completely, or keep a hand in. An owner might sell to a larger company and then take a different type of role with the organization. This could allow him to do the work he likes best -- say, working with customers -- all the time.
Other questions must be answered. Where is the business in its growth cycle? Many companies think the best time to sell is at the apex of their growth. Actually, the best time to maximize value is when the company has had a very strong year but expect to have an even better year next year. Buyers want a balance between strong financial performance and strong growth potential.
Of course, if a company is not profitable, it may still have opportunities. Buyers may want the company because of its strategic value (e.g., R&D capabilities or unique access to distribution channels.) But more typically, historical financial losses can be problematic. You may be well advised to work with a financial advisor to devise a strategy to become profitable and position your company for sale.
Personal Issues. A number of the factors mentioned above touch on personal issues. These issues may drive thoughts of selling, as well. For example, perhaps an owner is 40 and not ready to retire -- but wants to get out of his current business and into a related one. An advisor could help the owner explore the option of selling the business, investing some proceeds conservatively, and investing the remainder in a new or related business (with the advisor helping to write the noncompete clause so as to permit this).
Owners in their 50s may be thinking about securing their retirement and and/or transferring assets to the next generation. Owners in their 60s and 70s may want to reduce their involvement in the business or retire altogether. In all of these cases, advisors help owners determine their options, weigh them in light of the current market and make the decisions most likely to protect the owner’s wealth and maximize the value of his business.
In a seller’s market like this one, it makes sense to explore your options now.
--Patrick Winters is vice president of Duff & Phelps' mergers and acquisitons group. He primarily represents middle-market compaines pursuing a sale, recapitalization or new financing. He can be reached at 312-697-4600.