s integration the an$wer?

By Nicholas V. Beare

QINCE the end of 2006. building \)material companies have experienced a more difficult business environment. On a macro scale, the economy has cooled in conjunction with the housing market.

Consider also the concerns unique to the industry: rising transportation costs, higher priced raw materials, and supply chain disruptions, such as hurricanes, that increase delivery times. Anxious builders and suppliers are actively seeking options to remain profitable during a prolonged slowdown. What business initiatives can help curb this market deterioration?

Is integration the answer? Integration, as a business strategy, is nothing new. Many antitrust laws, designed at the turn of the 20th Century, were created to combat business combinations that were perceived as anti-competitive, In current practice, the enforcement of these laws remains stringent. However, we are seeing more horizontal transactions allowing former competitors to band together under one banner. Less stringent protocol is evidenced among vertical combinations-those that bring together supplier and customer.

Rinker Materials employs a vertical integration strategy involving downstream expansion into the manufacture of higher value products and control of its distribution channels. Rinker supplies construction materials, including aggregates, cement, readymix concrete, and masonry products.

As an aggregates producer, the firm has vertically integrated downstream into the production of higher-value products. As a building materials company, the firm controls its supply of quality aggregates and its distribution network. The company maintains a network of facilities and sales offices throughout the state. Through its rail distribution system, it can competitively ship aggregates from its FEC Quarry in Miami to Jacksonville, Fl.

Other firms have begun touting their vertical integration efforts. Boise Building Materials Distribution is a wholesale distributor of building materials with 28 locations across the U.S. In addition, Boise sells a line of building materials purchased from Boise's Wood Products business and other quality manufacturers.

Royal Group Technologies Ltd. manufactures polymer-based building products, serving the home improvement, consumer and construction sectors of the market. The company has operations dedicated to provision of materials, machinery, tooling, real estate and distribution services to its plants producing finished products.

Georgia Gulf Corp. recently announced a deal to acquire Royal Group. Georgia Gulf manufactures commodity chemicals, vinyl resins and vinyl compounds, which are the basic materials used to manufacture vinyl building and construction products. Vertical integration is accomplished: Royal's product portfolio combined with Georgia Gulf's vinyl resins and compounding technology creates a diversified company in the vinyl building products industry.

Within the building materials industry, there are numerous examples of how integration is becoming a more important business strategy.

. To better serve large production homebuilders, pro dealers have either opened or acquired manufacturing facilities for trusses, wall panels and other prefab products. Further, some of these dealers are also providing installation services for framing, insulation and plumbing. By being able to offer these additional products and services, these operators can better maintain margins and serve customers.

In the window and door sector, the ability to extrude the components that ultimately will be assembled into an end product is becoming critical. Extrusion capacity was likely a factor in the recent acquisitions by Andersen Corp. of Silverline Building Products and by Fortune Brands of SBR. By controlling the extrusion of components, manufacturers are able to lower their raw material costs as well as better control their supply chains.

. The production of ready-mix concrete requires both cement and aggregates (crushed stone and gravel) as raw materials. Recently, many cement producers have become interested in entering the ready-mix concrete business as a way to enhance their margins and to protect their regional and local markets. Similarly, ready-mix producers are looking to acquire aggregates' local quarries in order to reduce transportation costs and ensure themselves adequate supplies of gravel and stone.

In conclusion, the benefits of integration extend across many areas of the building materials industry; however, reduced costs, improved margins, and better customer service are common to all. As business conditions become more volatile, we expect more transactional activity based on the potential power of integration.

- Nicholas V. Beare is the Dallas, Tx.based managing director for Stephens Inc., Little Rock, Ar., where he specializes in building products and technologies investment banking. He can be reached at (214) 258-2747 or nick.beare@ steDhens.com.