CONSOLIDATORS - Slowing, but Growing
Thompson: In my view, Wall Street played a significant role. However, so did the Federal Reserve. The increase in interest rates had a major impact on companies' bottom lines and that, in turn, affected stock prices negatively. Consolidation requires capital, and the twin hammers of lower stock prices and higher interest rates in many instances effectively eliminated access to the capital markets for many companies.
Without access to the capital markets, companies had to either rely on bank debt, which is not always a viable option, or rely on internally generated funds. In either instance, the raw material that fuels an industry consolidation was either greatly restricted or, in some instances, eliminated altogether. The natural result has been a dramatic slowdown in consolidation activity.
Kashan: We're a private company, so Wall Street has had little effect on us. However, as an industry, the financial deals executed over the last few years now need time to be integrated. It appears, most of these companies are focused on how to proceed strategically with the businesses that they have grouped together. We believe we have integrated our companies well and now have a strong platform. Futher, there are still M&A opportunities in the marketplace, but the key to successfully executing these deals lies in the client base, manufacturing facilities and the cultural fit.
PI: What were some of the biggest mistakes that have been made by industry consolidators?
Norton: Many industry consolidators bought companies at ever increasing multiples as if there was no tomorrow.
Davis: Any time you're in the acquisition business—growing the company—you have to do it very thoughtfully, very carefully, and you have to structure transactions so that both the seller and the buyer benefit. It can't be one-sided transactions. And it has to be a reasonable price and a reasonable expectation of future earnings. Some of my competitors in the consolidation business didn't have the experience in the industry that we have and, because of that, they made some mistakes.