Is it a buyer’s or a seller’s market in wholesale distribution mergers &acquisitions? I think the answer is both, as there are a lot more variables on how value is being measured than even a year ago. If you run a tight ship and considering a sale, your value is still historically high. If you are a buyer with a clear strategy and view of current markets, there are great opportunities.
As this issue’s lead article details, the feeding frenzy of the past few years in wholesale distribution merger &acquisition activity is over. But note carefully that deal-making is not. Mega-deals with double-digit EBITDA valuations have cooled in risk-averse credit and economic climates. Well-managed smaller distribution companies are in some ways more marketable than ever, particularly as strategic buyers (the larger regional, national and international distributors) have been able to be more competitive with financial buyers (investment funds looking for good investments, typically to resell in a three- to five-year time span).
The key takeaway from our Webcast panel in May was that the bar has been raised on both seller and buyer sides. Those distributors who have invested to create a healthy business are seeing interest and even auctions. They may not be as crowded as a year or two ago, but they are likely just as intense if not moreso for companies that have built strong platforms.
Case in point: I had a conversation last week with a $70-million distributor that has put a lot of time and internal resources into cleaning up its product database. That distributor’s primary concerns were the incredible waste of time spent tracking and fixing order mistakes and confusion. But beyond the productivity gains with effort like that, there is a bump to the balance sheet. There is no question that this year or 20 years from now, the valuation of this distributor will reflect that hard work.
Every business that spends any time analyzing strengths and weaknesses can identify where it could be spending more time and money to reduce its constraints. As Al Bates pointedly showed in these pages recently with his research, distributors tend to ride the rollercoaster of good times and bad times, often focused on short-term cash flow at the expense of long-term value creation.
I’d argue that the current economy and shifts in credit markets are going to help create a clearer and wider gap between the companies that sacrifice margin and profitability for the sake of short-term sales, versus those who manage with a longer-term perspective. I expect that to play out from the smallest to the largest companies, private and public.