A Tale of Two Markets

Optimism Beats Pessimism for Companies Looking to Buy

By Michael Collins

The prevailing view of the current M&A and capital-raising environment for door and window manufacturers and other building products companies is somewhat a tale of two markets. When a company is brought to market, there are always potential buyers who back away from the diving board without requesting more information about the opportunity.

The Duality

In the case of recent private equity buyers looking at a deal in the glass space and an unrelated other segment of the building industry, their stated reasons for doing so paint the picture of one of the two prevailing markets. Groups said things like, “We’ve raised the bar for construction-driven deals at this point of the cycle,” meaning they’ve gotten more selective because of the length of the recovery. Another group said, “We have a fair bit of exposure to the construction cycle already in our first fund,” indicating that they’ve already made their building products bets and will harvest those investments in the future. Still another comment from a group that did not move forward was, “Given where we are in the cycle, we are going to respectfully bow out of this one.”

That’s an awful lot of bar-raising and bowing out. Does this mean it is too late for companies seeking to attract growth capital or to sell a door or window manufacturer? Far from it. There is another group of buyers and investors out there who supply us with the picture of the other market. This is one in which buyer interest is so high that valuations are very strong.

Groups that make the decision to offer on or acquire building products companies see three to five years of additional attractive growth ahead of us. They compare pundits who predict another huge recession with our grandparents’ generation—one that saw the next Great Depression around the corner their entire lives. History says it won’t happen, and almost none of the factors that led to the last bubble are at play in the current market.

In the last recession, home price increases were driven by buyers irresponsibly armed with mortgage financing they didn’t deserve. Today, price increases are caused by a short-age of lots on which to build and low existing inventory. The good news is that wages are rising along with home prices, leaving home affordability intact. The millennials are being uncharacteristically “old school” by making 10 to 20 percent down payments on the homes they’re buying.

Favorable Conditions

Add to this generally positive picture the strong availability of debt and equity capital, and you have an environment in which business valuations are robust. In fact, in our recent deals, buyers who plan to pursue the acquisition of glass and other building products companies fretted over the fact that the resulting valuation would likely surpass their willingness to pay. That is bad news for companies seeking to make acquisitions but it is decidedly good news for door and window manufacturers that decide to approach the market. We are likely in a golden two-year window to harvest the value created in a building product manufacturer or distributor.

The question is, what happens after that? No one has a crystal ball, but as the next soft patch becomes more palpable, valuations would tend to soften until the next stretch of growth becomes visible. Strategic buyers, those already in the building products industry, may pull in their reins and decide to wait out the next downturn, rather than keep buying. After all, they are already fully exposed to the industry and lack a PE fund’s ability to hedge their bets by buying companies in wildly different segments.

Dialing all of this in, now is a great time for making bold plans. If the cap-ital can be found to buy that thorn-in-your-side competitor, it is a great time to explore it. The next few years should be great for cash flow, allowing a buyer to pay down much of the debt needed to complete an acquisition. The same could be said for selling a company or for plant expansions.

The business case for such activities is still very easy to make. The various dynamics in the capital markets, the strength of the economy and growth drivers such as increasing energy efficiency make the case even easier in the door and window industry.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.

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DWM Magazine

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