To Buy or Not to Buy
Looking at the factors behind the industry’s M&A activity
I was grateful for the opportunity to moderate a well-attended panel on the strength of the mergers and acquisitions (M&A) market, Dispelling the Mystery Behind Mergers & Acquisitions, at the BCMC 2022 show in Columbus, Ohio. It featured four thoughtful panelists, including two prolific buyers and two recent sellers. While the long-awaited cyclical downturn is descending upon us, driven by mortgage rates that have more than doubled in the last six months, robust and long-term demand for housing will likely remain strong due to demographic trends and chronic undersupply. That said, the near-term slowdown in demand should magnify the opportunity for our industry to innovate and create lasting solutions that address systemic labor shortages while also reducing material waste.
Dispelling the Mystery Behind Mergers & Acquisitions
Today’s buyers are cash rich, and while there is significant uncertainty in the short-term, there remains a great deal of appetite for quality acquisitions. As we heard from the panelists, M&A is tactical from the buyer’s perspective. Defensive acquisition strategies include buying attractive new capabilities or market positions, where premiums are justified by the proof of concept the seller can deliver. On the other hand, offensive acquisition strategies allow the new owner to capitalize on disruptive technologies or digital transformation at an accelerated rate versus what an organic opportunity would provide. Why reinvent the wheel when it’s already there to be purchased.
Both Jim Hooper, SVP of M&A for US LBM, and Drew Whitcomb, VP of M&A for Builders FirstSource, provided clarity on how their respective companies have used both defensive and offensive strategies to maneuver themselves into favorable market positions. Moving forward, both companies continue to look for opportunities that align with this approach while fitting within the company-wide culture they seek to maintain.
From a seller’s perspective, the current macro uncertainty and small risk of a protracted downturn make partnering with a well-capitalized buyer feel like a safe bet. In the transactions we’ve recently closed, sellers have been able to leverage best practices and access additional capital while continuing to deliver on their vision and keep their core teams intact. This win-win approach allows the seller to crystalize value in their business and take money off the table, while continuing to deliver a high value proposition to their customers. Indeed, the structure of recent transactions has been consistent with valuation being derived from a multiple of the seller company’s EBITDA. Sale proceeds have been paid in one of two ways: all cash up front, or the sale of a majority ownership position with additional future proceeds based on results achieved over the following two to three years.
Dean Rana, president of Truss Fab Companies, was recently acquired by US LBM, while Shawn Overholtzer, former CEO of California Trusframe, was purchased by Builders FirstSource and now serves as its SVP components west division. Dean and Shawn also sat on the panel and shared their perspectives on how their operations benefited from their sale. Beyond the monetary gain, they both stressed how access to capital and operational synergies will allow them to achieve their long-term growth goals on an accelerated timeline.
It should be noted that while the drivers of price inflation, which the Fed is targeting with recent rate increases, extend to all things construction-related, there are reasons for optimism. On average, “sticks and bricks” represent half the cost of building a home. These materials continue to be in short supply despite several rounds of price increases by manufacturers. Labor challenges remain pervasive, which is further exacerbated by low levels of unemployment and decreased immigration. Limited developed land, supply constraints, and a tight labor market all contribute to our assumption that we will see a soft landing for housing this cycle, underscored by a shortage of new home supply, and resilient and robust demand.
As an investment banking boutique that represents the owners and sellers of housing and construction companies, we have never been more active. The range of buyers is wider than ever, but everyone is focused on opportunities in high-growth markets, looking to find the right fit with a seller that has deep local expertise, a reliable profit stream, and a strong team that will stay with the company in an increasingly talent-constrained market. Both buyer and seller panelists stressed how important all these attributes are in finding a match that will ultimately result in a completed transaction.
During the panel discussion, everyone stressed that the basic tools required of a seller to consummate a successful transaction include having reviewed or audited financials, a strong CFO or finance professional to produce a multi-year growth model, and an experienced transaction attorney who will focus on getting to the closing table. In short, sellers must be ready to move with purpose and intensity to achieve a successful outcome.
About the Author: Margaret Whelan is the Founder and CEO of Whelan Advisory Capital Markets, a boutique investment bank that represents owners and founders of housing companies as they pursue growth capital or M&A opportunities. Confidential conversations are always welcome; contact me at firstname.lastname@example.org