Before Landscape Forms Inc. acquired Kornegay Design last year, the Kalamazoo-based designer and manufacturer of site furniture, accessories and lighting mulled several acquisition targets that shared its design culture and core beliefs.
When the company finally decided on the deal for Kornegay Design, a landscape architectural designer and manufacturer of concrete planters from Phoenix, Ariz., the transition seemed to “fit perfectly,” said Jodi Havera, vice president of finance and CFO for Landscape Forms.
“We service our customers, which is to serve them in the best way we can,” Havera told MiBiz. “We follow the M&A activity in the furniture market — we are much smaller than the Herman Millers and Steelcases — but we, too, want to meet expectations from our customer base.”
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Robb Smalldon, who recently became executive vice president of development at Landscape Forms, said the deal for Kornegay Design expands the company’s offerings and allows it to become a premier player in the site furniture segment.
“In that acquisition, the founding folks were nearing retirement and didn’t have a succession plan,” Smalldon said. “It worked out well. (There are) a lot of synergies between the two companies.”
While Landscape Forms keeps revisiting its playbook to explore potential targets for future acquisitions, industry experts say deal activity seems to have flattened for West Michigan manufacturers, indicating a possible plateau in the current M&A cycle.
M&A attorney Dustin Daniels, a partner at the Grand Rapids-based law firm Miller, Johnson, Snell & Cummiskey PLC who works with several manufacturing clients, believes the active dealmaking cycle is “so strong” that it likely lacks enough runway for deal volume to increase much more.
“That’s not to say that it’s weakening, necessarily,” Daniels told MiBiz. “It’s just been so strong for so long, it’s hard to imagine it picking up. In a lot of ways, I think being flat is not unhealthy given how strong it’s been the last few years.”
Daniels’ sentiment aligns with the findings in a national report from PricewaterhouseCoopers, which described the current M&A cycle as “complicated.”
According to the report, while economic growth remains steady and will likely accelerate, the number of U.S. deals has flattened in recent quarters. Despite the deal market reaching a plateau, PwC doesn’t think the factors “necessarily signal the end of the M&A cycle.”
To Daniels, the report demonstrates the maturity of the M&A market for manufacturers, as well as some underlying uncertainty for advisers because the current cycle is hanging on longer than most expected.
When making annual forecasts, Varnum LLP attorney Peter Roth often is surprised by how strong the market has remained year after year.
“I’ve said we’ve got to be towards the back end of the cycle, and then another year goes by and we’re in another good market,” Roth said. “If the economy keeps going, I think it’ll continue to bump along as it is now — good, but not great. If we get out into 2019 and the economy starts to slow, or … people think we’re heading toward a recession, then that’s when I think you’ll see the end of the cycle.”
Roth also focuses on M&A activity with multiple clients in the manufacturing sector. Like Daniels, he said the current M&A market is “very strong,” but it is changing.
“We’re still as busy as we’ve been, and lots of good clients (are) doing good deals,” Roth said. “But I would say it’s not an environment where every deal gets done, or every deal has 10 people bidding on it like a couple of years ago. It’s not an environment where every deal’s getting a premium valuation.”
The reason: “I think people are being more cautious,” he added. “It’s harder to get deals done.”
MAKING DEALS
Perhaps bucking the national trend, West Michigan manufacturers remain active in completing deals so far in 2018.
According to M&A data compiled and analyzed by MiBiz, the overall deal volume in West Michigan increased 6 percent year-over-year through the end of July. Manufacturers also made up a higher percentage of deals: 37.5 percent this year compared to 28.9 percent through the same period in 2017.
In part, serial acquirers are driving M&A deal activity locally in recent months. Kalamazoo-based medical device manufacturer Stryker Corp. leads the pack with five acquisitions over the last 15 months, followed by Holland-based JR Automation Technologies LLC with three deals in the last six months.
Grand Rapids-based Burke Porter Group also completed three deals so far in 2018. Last month, the manufacturer of dynamometers, instrumentation and assembly systems acquired the Florence, Italy-based Galileo TP Process Equipment S.r.l. as part of a “desired strategy” to pursue more tech-oriented companies.
Other serial acquirers include office furniture manufacturers such as Zeeland-based Herman Miller Inc. and Grand Rapids-based Steelcase Inc., each with a pair of deals since December 2017.
ON THE SIDELINES
With some signs nationally that M&A deal volume has begun to flatten out, some experts note that companies are hoarding more cash than ever before. According to the PwC report, cash on hand for U.S. corporations and investors reached $2.4 trillion in 2017, up from roughly $2.3 trillion in 2016.
“This trend has kept valuations elevated as the demand for deals exceeds the related supply,” according to the report.
Roth at Varnum also is “seeing some of that,” noting that a lot of his clients who are in manufacturing are simply being cognizant of the last recession when deciding to take on debt to fund deals.
“When people are too levered or didn’t have a safety net, a lot of them got in trouble. People still remember that, so they’re being a little more cautious,” he said.
However, even if the economy were to dip, opportunistic companies with the “cash and borrowing capacity to strike” can capitalize on distressed deals, he added.
“I think there’s a sense — and I share this sense — that over the past five years, there have been a lot of deals done at premium valuations with a lot of leverage,” Roth said. “If there’s a slowdown, if multiples and valuations continue to go down a bit, you could have a position where people — especially maybe private equity and where they are in their cycle — are having to unload businesses and have exits.”
Advisers contacted for this report said private equity buyers remain active in manufacturing deals across West Michigan and nationwide. As Daniels sees it, private equity firms still seem to have “more money to invest than there are opportunities to invest in,” which has resulted in them being more aggressive in pursuing deals.
“They have more of an incentive to put the money to work so they can start earning a return on their money to give everybody a carried interest,” Roth said. “Corporate buyers can be more patient.”
DEALING WITH UNKNOWNS
Numerous macroeconomic issues like steel and aluminum tariffs and international trade agreements have created disruption in the automotive industry, which could affect dealmaking among suppliers locally, Daniels said.
In part, automotive suppliers are being forced to deal with added costs as domestic steel producers “raise their prices to make more money,” he said.
“I think it’s too early to tell how that will truly play out though,” Daniels said. “I think it needs to take some time.”
Despite some unknowns in the global industry of manufacturing, the National Association of Manufacturers in June surveyed hundreds of manufacturers and found that 95.1 percent have a positive outlook for their companies, an all-time high.
The survey, which received responses from 568 companies of all sizes, indicated that “it is clear that businesses continue to experience highly elevated levels of activity as a result of pro-growth policies like tax reform, with optimism once again breaking records.”
For Daniels, “everyone seems to be still optimistic,” despite apparent headwinds. In part, the optimism stems from the continued strength in the economy and the markets, he added.
“There’s definitely some unknowns with the tariffs and that (makes) people a little more conservative,” Daniels said. “But overall, I would say the theme still seems to be pretty positive.”
