Industrial M&A: What to Expect for 2015
It’s the time of year when everyone prognosticates on what the new year will bring. As it relates to industrial distribution M&A, I predict more of the same — but that doesn’t mean you should
stop reading. In my estimation, the reasons for continued strong
M&A activity in 2015 are both practical and theoretical.
Practical: Capital Abounds
First the practical: companies invest in
growth when they have access to capital
and a need for more capacity. On both
those scores, the industry appears ripe
for better-than-average M&A activity.
First, companies have been pretty prudent since the Great Recession and are
sitting on strong balance sheets for the
most part. In addition, the debt markets
are about as generous as I’ve ever seen
them, with banks providing good companies incredibly favorable rates and terms. And private investment firms have plenty
of capital which they are hoping to deploy in this sector. This all
means that good companies looking to make acquisitions have
plenty of access to capital.
The other part of the equation – the need for capacity – is
nearly as robust. Manufacturing is predicted to grow four
percent in 2015 (according to the Manufacturer’s Alliance for
Productivity and Innovation), faster than the overall economy.
And Total Wholesale Trade was up 4. 9 percent over the past
year. This, of course, is a strong indication of future growth in
the industrial distribution sector. At the same time, steadily falling unemployment, plus generally lower capital expenditures in
the years following the downturn, would indicate high capacity utilization; add to this stew the fact that our friends at the
Institute for Trend Research recently indicated that the annual
average Total Industry Capacity Utilization Rate is running at
levels last seen in late 2008. As excess capacity narrows, firms
have no choice but to invest in their business. One of the most
expedient ways to add capacity and grow your business is, of
course, by making acquisitions. So from a practical standpoint, it
just makes sense that mergers and acquisitions would continue
to be a significant aspect in the industrial distribution landscape.
Theoretical: The Market Factors
On to the more theoretical: there are plenty of market factors
in the industrial distribution segment that can be addressed and
mitigated by making appropriate acquisitions. It seems as though
many firms are moving from specialization to one-stop shopping
in order to compete with larger rivals and
provide more value for their customers.
This, of course, requires moving into
adjacent and complementary product
categories, often by acquisition. The same
concept applies to companies looking to
expand their geographic reach. Whether
expanding into neighboring counties or
countries, it’s often easier (and certainly
faster!) to acquire a new footprint rather
than build one from scratch.
Technology challenges may also spur
M&A activity. E-commerce is both an opportunity and a threat,
and it is hard to argue that the market isn’t barreling toward a
more technologically-enabled distribution channel. This creates
the need not only for technology capabilities, but also greater
logistics savvy, both of which are more prevalent in larger com-
panies in the space. Smaller companies may find that making
acquisitions gives them the scale to invest in e-commerce. Larger
companies may find that making targeted acquisitions gives them
access to very specialized e-commerce skill sets that they didn’t
Sales forces are also becoming increasingly important to industrial distribution, and finding good talent is always a challenge.
Acquiring a company with an industry-leading sales organization
may be easier than training your existing force or managing the
turnover required in overhauling it.
With the U.S. economy humming along nicely relative to and in
spite of challenges elsewhere, it stands to reason that U.S. companies could be both hunter and hunted. American firms could make
attractive targets for both domestic and foreign firms (relative
currency valuations notwithstanding). And domestic firms may
find relative value and opportunity by expanding internationally
Regulation is the final market factor that may spur M&A activity. Bigger companies are better equipped to deal with a world of