It Pays to Keep a Close Eye On Business and Market Conditions

By Michael Collins

We begin each new year by looking back, reflecting on merger and acquisition (M&A) activity over the prior year for deals where at least one side of the transaction was a U.S.-based door or window manufacturer. This year, we spotted several interesting trends. First, buyers showed up in full force, with acquisitions returning to levels last seen in 2016 and 2018.

The strong level of acquisition activity in 2021 came on the heels of a COVID-induced industry-wide pause. Just five deals completed in 2020, and it is very likely that most of those deals had been initiated prior to the pandemic. The most positive aspect of having a low level of M&A activity when every manufacturer in the industry is facing a huge, overarching challenge, is that we know there weren’t widespread forced sales last year. Such sales include companies facing a survival threatening financial challenge, as was the case with many fenestration companies sold in 2008 to 2010. Last year, though, companies were financially sound enough to weather the storm on their own and avoid selling into a high-risk, uncertain market.

When companies began sharing their June 30, 2020, half-year results last year, it became clear that—against all odds—the fenestration industry was performing well and remaining highly profitable. As the months of 2020 passed, it became clear that this trend was not a fluke. Unlike the bubble seen in the early 2000s, mortgage availability remained disciplined over the past two years and homeowners who decided not to travel or spend as they did in the past found themselves with growing back balances to fund remodeling projects.

When a market is driven by these kinds of fundamentals, rather than unbridled speculation, there is no need for that market to “pop.” The market may soften in two years, but there is no reason to believe we will drop off some cliff of demand in 2023 or 2024.

Not revealed in the chart of 2021 M&A activity was the strong level of activity for nearly all areas surrounding the manufacture of doors and windows. This included the software segment. Other ancillary deals included various profile and hardware suppliers that were acquired over the past two years.

Most of all though, the door and window distribution segment appears to be heavily “in play,” meaning buyers in the segment are lining up deals and viewing potential acquisitions as moves on their own strategic chessboard.

As a long-term observer of M&A activity, we have seen one key historical metric remain the same year after year. Of just over 450 acquisitions identified since 2000, strategic buyers represent an average of roughly 75% of acquisitions, while private equity buyers account for the remaining quarter of deals. There is no particular right or wrong ratio. However, a healthy presence of both types of buyers contributes to greater market efficiency and an enhanced ability
of sellers to exit their businesses. So far as this year is concerned, market fundamentals remain strong, setting the stage for another batch of solid M&A activity.

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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