Strategic buyors back on top

By Nicholas V. Beare

Iijorldwide

mergers & acquiY Y sitions activitv reached a record $3.8 trillion over the first nine months of 2001, according to Dealogic.

Much of the activity was directly attributed to private equity interests. which raised nearly $198 billion worldwide during the year. Flush with cash, private equity firms like Bain Capital, Carlyle Group, and Clayton, Dubilier & Rice entered the LBM industry, buying both large and small companies, culminating with August's $8.5 billion purchase of HD Supply. Yet, this transaction seemingly may have signaled the end of a private equity run in the industry-as evidenced by the deal price reduction.

The record year-to-date M&A volumes are deceptively buoyed by an extraordinary first half of the year. In the third quarter, the credit crunch left a noticeable impact on worldwide deal volumes, which were off 427o to $l trillion compared to $1.7 trillion in the second quarter. Over the past few months, the residential housing market has continued to soften, with no general consensus on the timing of a rebound. Sub prime market concerns have led to an overall tightening in the credit markets. Facing such strong headwinds, private equity has reigned in its spending.

However, this reticence by private equity has given more power to strategic buyers, who are less constrained by timing and credit issues. In 2008 expect to see plenty of transactions unfold, as small building material companies are acquired by strategic industry players.

Private Equity Out, Strategics In

For the past five years, cash-flush private equity firms have aggressively purchased companies in "stable" industries-ranging from healthcare to utilities. This year alone, some 7O7o of deals for U.S. publicly traded targets have been all-cash transactions, according to FactSet.

To highlight a small sampling of deals in the building products industry, consider: In 2003, Kenner bought Atrium. In 2004, Caxton-Iseman picked up PlyGem. In 2005, KKR acquired Masonite. ln 20O7, Graham Partners bousht out FlexTrim and

Schneller, while Bain Capital Partners scooped up American Standard.

Until mid-2007, strategic buyers were losing out in auction after auction, as multiples were pushed to new heights by private equity with bulging coffers and access to credit. Now, the tables are turning. With financing markets in disarray, private equity buyouts are being delayed. Many private-equity firms will face difficulty closing deals until credit markets calm and banks sell the debt stockpile on their balance sheets.

Strategic buyers now have an advantage in vying for deals, using stock, cash or a combination to pay for acquisitions. They also have the ability to generate synergies by eliminating expenses to justify a higher price tag. Large companies are always on the lookout for acquisitions that generate additional growth and margin. These sophisticated buyers also desire companies with established brands, new territories/distribution channels, and locations that enhance their existing operations. Now the opportunity is ripe, as many complementary companies are actively seeking or being forced to consider exit strategies.

A. Weak Sumivalfor the Small

By the beginning of 2007, soft market conditions had filtered through many LBM companies' financial results, with earnings announcements outlining losses of anywhere from 47o to 407o.In this environment, companies have begun to pare back, ranging from the complete shut-down of family-owned businesseS like Grand Rapids Sash & Door to plant closures at Weyerhaeuser and L-P.

B. Divestitures

Other companies are divesting ancillary product lines. Most notable was Home Depot's divestiture of HD Supply, to reposition efforts on its (Please turn to page 53)