Avoiding Pitfalls: Plan Your Route Before You Expand

By Michael Collins

If you occupy a window seat near a wing on just about any commercial jet flight, odds are when you look out you’ll see the warning: DO NOT WALK OUTSIDE THIS AREA. Given a trend we’ve seen recently in other parts of the construction industries, I wonder how many corporate executives wish they’d looked out over their upcoming plans and contemplated such a warning.

Lately, we have noticed ever more construction-related companies creating or acquiring firms that take them beyond their core businesses. Just this month, for instance, the roofing dealer SRS Distribution launched a company devoted to the irrigation and landscaping industry.

In contrast, just about all of the M+A deals that DWM has reported lately suggest that door and window manufacturers are acquiring businesses that do pretty much what the buying firms do already. But headlines from inside the industry, and CNBC reports from outside of construction, could easily lead owners of independent door and window operations to think that perhaps they, too, should expand beyond their current limits. Adding to the dilemma, many of those people are entrepreneurs at heart.

Times for Risk

Sometimes, these moves make sense. Consider the shape many makers of wooden doors and windows would be in today, had they not begun years ago to produce goods out of vinyl and fiberglass. And consider Masonite’s experiments with Advisar (with its new model for sales and delivery)—a business that potentially could shake up the custom door business. But some deals aren’t as much of a logical fit. And the reasons why others partake might not be immediately apparent, either.

One big difference is the initiatives you hear of most often involve public companies, as well as private equity-owned businesses that aim to go public one day. These firms may see buying one company after another as creating a series of stepping stones with which, by the end, they can grow through acquisition without having to put up much equity. In addition, the bigger they are, the more likely it is that they’ll get attention from the truly big private equity operations, as well as the investment banks who lead initial public offerings. For these folks, the bigger the company, the better. And as for the long-term futures of these companies—as well as their apparent lack of symmetry—they don’t need to be considered, because, after all, the private equity firm and initial public offering managers will be moving on soon. Then it will be the new owner’s job to either make all the pieces fit or spin off the ones that don’t.

Filing a Flight Path

Walking too far onto the wings of your core business also can cause difficulties, should you decide to sell the company. Private investors often prefer so-called “pure play” deals in which they buy a company engaged in a single segment, rather than an operation with two very different units. They might covet one part of your company, but have so little interest in the other divisions that it sours their desire to buy. This is particularly the case if all of a company’s diverse areas are legally held by one entity.

If the entrepreneurial spirit calls and a door or window manufacturer decides to enter a relatively unrelated segment, it is likely better to do so via a separate corporate entity. That way, the new business can be evaluated more effectively on its own merits and the financials can still be consolidated in order to show the economic results of the overall organization. A final advantage is that such a structure preserves the option to sell one division out of a company, with the ability to present buyers with the financials for only that division.

The conclusion is ages old, but still fresh and applicable today: Fit and finish matter as much with deals as with products. Proceeding with a poorly planned and executed expansion could put you in the later position of having to fix a broken wing while still in flight. My advice? Don’t walk outside that area.

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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