Rock LaManna, Contributing Editor09.13.13
What does history teach us? Or, more appropriately, what will we allow history to teach us? In the case of consolidation and the label industry, it entirely depends on one thing: Fear.
As I’ve said many times before, fear is a four-letter word in the business world. It prompts bad decisions, irrational thought, and poor strategy.
Fear can also motivate people to take notice of the world around them, and prompt them to act.
I hope fear inspires the latter, because there is a trend taking place in the label industry that should make you more than a little bit fearful about your business and the industry.
I’m referring to the industry consolidation Tom Blaige and his firm, Blaige & Company, detailed in their research paper, “Twelve Year Plastics & Packaging M&A Consolidation Study (2001-2012).”
The study focuses on the seven major processing segments and key end markets of the plastics industry. Blaige and his team focused on the M&A activity in the market, analyzing transactions and deriving some conclusions that you may find quite revelatory – or frightening, as the case may be.
A Consolidated History of Consolidation
The converting industry is now undergoing consolidation, a process similar to the one experienced by more established industries such as metal or glass.
Converting and plastics is relatively young, borne of necessity during World War II. For a historical perspective of how consolidation has impacted other businesses, I referenced this paper on industry consolidation from the Tuck School of Business at Dartmouth.
Written as a blueprint (or perhaps in this case, warning) of how to navigate through a consolidating industry, the paper references two historical waves of consolidation.
Wave One: March of the Moguls
In the 19th century, legendary American entrepreneurs such as John D. Rockefeller and Jay Gould rode the wave of the industrial revolution and applied their business acumen to “unsophisticated industries.” The result: Industrial empires of Romanesque proportions.
Take the railroad system, for example. It operated “under a principle of local management for small railway systems,” similar to today’s fragmented, regional converters. International shipments were accomplished through a loose network of alliances.
Railroad mogul Jay Gould’s consolidation efforts led to a “self-contained system,” and this competitive expansion drove many lines to financial failure. In the end, 25 leading lines survived.
The oil industry followed suit. Standard Oil achieved “monopoly power through regional consolidation and vertical integration.” John D. Rockefeller scooped up local refineries in the “oil region” around Cleveland, and eventually had 90% of the refining capacity in the United States, resulting in “substantial economies of scale and scope.”
Wave Two: The Conglomerate Crumble
The second wave of consolidation occurred in the 1960s. Big corporations began to create conglomerates, stretching outside of their traditional lines of business. For companies such as Beatrice, this proved to be a disastrous strategy.
Beatrice began in 1898 as a creamery, but attempted to expand in the 60s and 70s, acquiring companies such as Avis, Playtex and Tropicana. All these different cultures and customer bases proved too difficult to sustain, and Beatrice was forced to divest all these companies. Their failure was replicated by companies such as ITT and Westinghouse.
Consolidation in the Label and Converting Industry Today
Today we see a wide range of Financials (private equity firms and banks) & Strategics (companies in the printing and converting business) who are actively driving the consolidation trend. Similar to Jay Gould and the railroads, they are looking to bind together regional players to provide a more efficient, streamlined distribution. And they are taking action. According to Blaige’s study. “58 percent of the top 50 US players across all plastics manufacturing segments have either been eliminated or changed ownership (merged or sold) since 2001.”
The statistics for the Label industry trail the overall plastics manufacturing segments, but not by much. “Over the past twelve years, 26 (52%) of the top 50 label companies in North America have experienced an ownership transition.”
The report breaks those statistics down even further, showing the types of ownership transitions that occurred.
Twenty (40%) of the leading label converters have been eliminated through consolidation over the past decade.
Six (12%) of the top players sold a controlling interest yet maintained their corporate identity.
Blaige notes that the reason why the label industry lags behind the overall converting industry may be due to the fact that the label industry is “less reliant” on capital expenditures when compared to the rest of the industry.
“This creates an environment in which private companies have been able to survive at a greater rate than other segments,” the report notes. Of those companies that have resisted the call to consolidate, 60% were small to mid-sized processors.
Their resistance to change may be akin to an ostrich sticking its head in the sand to hide. Consider the trends that have prompted the top players to act:
Globalization: As brand companies expand their market share globally, they’re expecting suppliers to have a global reach as well, which is why M&As among international participants have risen. According to Blaige’s findings, “International-only deals have increased from 40% of all M&A deals in 2001 to 45% in 2012, reflecting an ongoing trend toward globalization in the past twelve years.”
Fragmentation: The industry is more fragmented, and there are a greater number of companies in the universe. For example, there are 1,450 US plastics processors. Large processors, with sales north of $500 million, comprise 3% of the market. Mid-size companies, with sales $50 to 500 million, make up 19% of the market. That leaves 78% of the market to companies under $50 million.
Money to Burn: Despite the recession of 2008, funds committed to private equity investment grew rapidly. “The amount of un-invested private equity capital has grown nearly tenfold over the past decade to a staggering $432 billion.” Private investors are now accessing that cash and fueling M&A activity.
How has the industry reacted to the trends? Blaige sees three different paths being pursued – or in some cases, not pursued:
1. Leaders – The top 10-20% of companies who maintain the leadership status through aggressive M&A strategies, which include the best acquisitions and selective divestitures.
2. Followers – The next 10-20% of the industry who are rapidly losing market share and will be required to go through restructuring and/or divestitures.
3. Others – The remaining 60-80% of the industry, who isn’t doing much of anything. Blaige believes they’re sitting still, relying on the way “things have always have been done,” and are ignoring the impending consolidation that’s creeping across the landscape.
Who Should Act, and Who Will Benefit the Most
Everyday, owners of label companies are faced with these types of decisions. They must decide not only if they should act, but when they should do it.
The natural tendency is to do nothing – such as the “Others” in Blaige’s description. Generally these are family businesses, under $50 million, with a mentality of “this is the way we’ve always done it.”
Sometimes sticking with the status quo can be a good move when you’re uncertain about alternatives, or you don’t have solid data to back up the need to take action. However, the historical trends and Blaige’s report present a compelling argument to do otherwise.
So if you decide to join in on the consolidation fun, what should you shoot for in terms of company size?
Blaige believes ideal size to be $100 million in annual revenue. “If you get to the $100 million, you are bigger than 90% of the universe, and you’re going to be more solid,” he says.
He also notes that among the top 50 players that have not merged or sold, those with access to private equity, public market or corporate capital are on average 3.4 times larger than their competitors. These bigger companies are much more likely to weather economic shocks and survive for the long run.
How in the world does a smaller company leap to that size? Mergers and acquisitions have long been the growth vehicle for big companies, but there’s no reason why they can’t be part of a strategy for smaller companies. For example, if you’re a $30 million company, two mergers with comparable-sized companies suddenly propel you to that coveted $100 million mark.
As the recent mergers in the label industry indicate, there are also a number of different types of M&A options to consider. You could choose an M&A with a competitor or someone in your supply chain. You could also sell part of your business to an institutional investor, and let them use their acquisition team to find add-on businesses to generate more revenue.
But when to move? When will consolidation adversely affect you? There are no definitive answers, but there is no denying the sense of urgency being exhibited by top players. The marketplace is showing favorable multiples for label companies, ranging from 6-8 times; with substantially higher multiples for label producers in highly-regulated industries.
To me, the most chilling argument, and the one which brings us full circle back to my earlier statements on fear is Blaige’s comments: “You might wake up one day and your competitor will have taken over 40 percent of your business because an M&A suddenly gives him a global footprint. And your clients will be all too happy to jump ship.”
So what will you do? A Leader, a Follower, or an Other? Will you pursue Blaige’s three options of “lead (acquire), follow (merge) or get out of the way (sell)”? The decision you make will be a difficult one, without a doubt, but as the market trends and historical facts indicate, it is one you’ll need to make in the very near future.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.
As I’ve said many times before, fear is a four-letter word in the business world. It prompts bad decisions, irrational thought, and poor strategy.
Fear can also motivate people to take notice of the world around them, and prompt them to act.
I hope fear inspires the latter, because there is a trend taking place in the label industry that should make you more than a little bit fearful about your business and the industry.
I’m referring to the industry consolidation Tom Blaige and his firm, Blaige & Company, detailed in their research paper, “Twelve Year Plastics & Packaging M&A Consolidation Study (2001-2012).”
The study focuses on the seven major processing segments and key end markets of the plastics industry. Blaige and his team focused on the M&A activity in the market, analyzing transactions and deriving some conclusions that you may find quite revelatory – or frightening, as the case may be.
A Consolidated History of Consolidation
The converting industry is now undergoing consolidation, a process similar to the one experienced by more established industries such as metal or glass.
Converting and plastics is relatively young, borne of necessity during World War II. For a historical perspective of how consolidation has impacted other businesses, I referenced this paper on industry consolidation from the Tuck School of Business at Dartmouth.
Written as a blueprint (or perhaps in this case, warning) of how to navigate through a consolidating industry, the paper references two historical waves of consolidation.
Wave One: March of the Moguls
In the 19th century, legendary American entrepreneurs such as John D. Rockefeller and Jay Gould rode the wave of the industrial revolution and applied their business acumen to “unsophisticated industries.” The result: Industrial empires of Romanesque proportions.
Take the railroad system, for example. It operated “under a principle of local management for small railway systems,” similar to today’s fragmented, regional converters. International shipments were accomplished through a loose network of alliances.
Railroad mogul Jay Gould’s consolidation efforts led to a “self-contained system,” and this competitive expansion drove many lines to financial failure. In the end, 25 leading lines survived.
The oil industry followed suit. Standard Oil achieved “monopoly power through regional consolidation and vertical integration.” John D. Rockefeller scooped up local refineries in the “oil region” around Cleveland, and eventually had 90% of the refining capacity in the United States, resulting in “substantial economies of scale and scope.”
Wave Two: The Conglomerate Crumble
The second wave of consolidation occurred in the 1960s. Big corporations began to create conglomerates, stretching outside of their traditional lines of business. For companies such as Beatrice, this proved to be a disastrous strategy.
Beatrice began in 1898 as a creamery, but attempted to expand in the 60s and 70s, acquiring companies such as Avis, Playtex and Tropicana. All these different cultures and customer bases proved too difficult to sustain, and Beatrice was forced to divest all these companies. Their failure was replicated by companies such as ITT and Westinghouse.
Consolidation in the Label and Converting Industry Today
Today we see a wide range of Financials (private equity firms and banks) & Strategics (companies in the printing and converting business) who are actively driving the consolidation trend. Similar to Jay Gould and the railroads, they are looking to bind together regional players to provide a more efficient, streamlined distribution. And they are taking action. According to Blaige’s study. “58 percent of the top 50 US players across all plastics manufacturing segments have either been eliminated or changed ownership (merged or sold) since 2001.”
The statistics for the Label industry trail the overall plastics manufacturing segments, but not by much. “Over the past twelve years, 26 (52%) of the top 50 label companies in North America have experienced an ownership transition.”
The report breaks those statistics down even further, showing the types of ownership transitions that occurred.
Twenty (40%) of the leading label converters have been eliminated through consolidation over the past decade.
Six (12%) of the top players sold a controlling interest yet maintained their corporate identity.
Blaige notes that the reason why the label industry lags behind the overall converting industry may be due to the fact that the label industry is “less reliant” on capital expenditures when compared to the rest of the industry.
“This creates an environment in which private companies have been able to survive at a greater rate than other segments,” the report notes. Of those companies that have resisted the call to consolidate, 60% were small to mid-sized processors.
Their resistance to change may be akin to an ostrich sticking its head in the sand to hide. Consider the trends that have prompted the top players to act:
Globalization: As brand companies expand their market share globally, they’re expecting suppliers to have a global reach as well, which is why M&As among international participants have risen. According to Blaige’s findings, “International-only deals have increased from 40% of all M&A deals in 2001 to 45% in 2012, reflecting an ongoing trend toward globalization in the past twelve years.”
Fragmentation: The industry is more fragmented, and there are a greater number of companies in the universe. For example, there are 1,450 US plastics processors. Large processors, with sales north of $500 million, comprise 3% of the market. Mid-size companies, with sales $50 to 500 million, make up 19% of the market. That leaves 78% of the market to companies under $50 million.
Money to Burn: Despite the recession of 2008, funds committed to private equity investment grew rapidly. “The amount of un-invested private equity capital has grown nearly tenfold over the past decade to a staggering $432 billion.” Private investors are now accessing that cash and fueling M&A activity.
How has the industry reacted to the trends? Blaige sees three different paths being pursued – or in some cases, not pursued:
1. Leaders – The top 10-20% of companies who maintain the leadership status through aggressive M&A strategies, which include the best acquisitions and selective divestitures.
2. Followers – The next 10-20% of the industry who are rapidly losing market share and will be required to go through restructuring and/or divestitures.
3. Others – The remaining 60-80% of the industry, who isn’t doing much of anything. Blaige believes they’re sitting still, relying on the way “things have always have been done,” and are ignoring the impending consolidation that’s creeping across the landscape.
Who Should Act, and Who Will Benefit the Most
Everyday, owners of label companies are faced with these types of decisions. They must decide not only if they should act, but when they should do it.
The natural tendency is to do nothing – such as the “Others” in Blaige’s description. Generally these are family businesses, under $50 million, with a mentality of “this is the way we’ve always done it.”
Sometimes sticking with the status quo can be a good move when you’re uncertain about alternatives, or you don’t have solid data to back up the need to take action. However, the historical trends and Blaige’s report present a compelling argument to do otherwise.
So if you decide to join in on the consolidation fun, what should you shoot for in terms of company size?
Blaige believes ideal size to be $100 million in annual revenue. “If you get to the $100 million, you are bigger than 90% of the universe, and you’re going to be more solid,” he says.
He also notes that among the top 50 players that have not merged or sold, those with access to private equity, public market or corporate capital are on average 3.4 times larger than their competitors. These bigger companies are much more likely to weather economic shocks and survive for the long run.
How in the world does a smaller company leap to that size? Mergers and acquisitions have long been the growth vehicle for big companies, but there’s no reason why they can’t be part of a strategy for smaller companies. For example, if you’re a $30 million company, two mergers with comparable-sized companies suddenly propel you to that coveted $100 million mark.
As the recent mergers in the label industry indicate, there are also a number of different types of M&A options to consider. You could choose an M&A with a competitor or someone in your supply chain. You could also sell part of your business to an institutional investor, and let them use their acquisition team to find add-on businesses to generate more revenue.
But when to move? When will consolidation adversely affect you? There are no definitive answers, but there is no denying the sense of urgency being exhibited by top players. The marketplace is showing favorable multiples for label companies, ranging from 6-8 times; with substantially higher multiples for label producers in highly-regulated industries.
To me, the most chilling argument, and the one which brings us full circle back to my earlier statements on fear is Blaige’s comments: “You might wake up one day and your competitor will have taken over 40 percent of your business because an M&A suddenly gives him a global footprint. And your clients will be all too happy to jump ship.”
So what will you do? A Leader, a Follower, or an Other? Will you pursue Blaige’s three options of “lead (acquire), follow (merge) or get out of the way (sell)”? The decision you make will be a difficult one, without a doubt, but as the market trends and historical facts indicate, it is one you’ll need to make in the very near future.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.