Commentary: M&A Market Focuses on Value

The first few days of 2010 have already produced a number of announcements regarding deals in distribution and manufacturing sectors. There are a relatively high percentage of distressed sales, but some healthy companies are in play, as well. There are some excellent opportunities to build value in this part of the cycle. It's a fundamentally different M&A landscape than just a few years ago when valuations were sky high, and distribution markets were the hot ticket for investment funds.

The first few days of 2010 have already produced a number of announcements regarding deals in distribution and manufacturing sectors. There are a relatively high percentage of distressed sales, but some healthy companies are in play, as well. There are some excellent opportunities to build value in this part of the cycle.

It’s a fundamentally different M&A landscape than just a few years ago when valuations were sky high, and distribution markets were the hot ticket for investment funds. Today’s market is characterized by strategic buyers buying share on the upswing. I think that in addition to larger distributors’ taking advantage of current market conditions, we will also see more complex and unexpected deals led by small and mid-sized companies who are cash-healthy, strategically managed and know value when it knocks on the door.

Let’s take a brief look at one distribution sector to understand just how this diversified industry still has a lot of room for both consolidation and value creation. Welding gases and equipment represented a U.S. market in 2008 of $6.48 billion, according to estimates by Industrial Market Information (top ten industries, by SIC code, consuming these products and the 2008 end-user consumption of these groups sorted by the nine government market regions appeared in the Dec. 10, 2008, issue of MDM).

This sector has experienced more consolidation than most others. Airgas estimates its market share at 25 percent of the gases and welding hardgoods industry, and it has made more than 400 acquisitions over 27 years. In a recent analyst presentation, Airgas said there are more than 900 packaged gas distributors in the market. Independent distributors account for half of that. Half of those include the 100 largest independent distributors, which average $30 million in annual revenue. The balance averages $4.5 million in annual revenue each.

In its presentation, Airgas said that smaller distributors make attractive acquisition candidates. That will be especially true this year as distributors – large and small – look more seriously for tangential growth in adjacent industries. For Airgas, that means safety products, refrigerants, CO2, dry ice, ammonia and Red-D-Arch rental extensions.

To me, the above illustrates what has applied through every part of the economic cycle: Small and mid-sized distributors who provide high service levels and manage to profitability metrics control their own fate when it comes to both growth and exit strategy.

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