Economy, geopolitics weigh on M&As

Last year was supposed to be a fairly solid one for mergers and acquisitions, especially across the rubber and plastics industries.

And to some degree, it was. There was, after all, an influx of cash for many larger companies looking to build on successes they saw in the wake of the pandemic.

And while 2022 started strong on the M&A front, it finished with a little less oomph.

"As the year progressed and as inflation started to hit, my firm began to see a slowdown in interest on the part of what we call strategic buyers—that is manufacturing companies or other companies directly engaged in the same business," said Bill Ridenour, owner of Polymer Transaction Advisors Inc.

The economy, for most of 2022, wasn't optimal, particularly with the rapid inflation and high interest rates. And it doesn't look like those economic tensions will lessen in the months ahead.

"I think Congress has limited ability to influence the economy, particularly when each party controls one house," Ridenour said. "… So the likelihood is that this mess is going to continue for another two years."

Amid economic slowdowns, Ridenour said, strategic buyers do two things: They step back and keep an eye on the market for signs of stabilization, and/or they invest in operations by expanding, streamlining or upgrading current facilities.

And that's exactly what he saw happening in the latter part of 2022.

Companies began to think: "maybe it makes more sense to take a look at our current operations, streamline them, make them more efficient, fix them, shape up our marketing efforts and our internal development of business rather than go out and do an M&A, which is very high priced and higher risk than it normally would be," Ridenour said.

These are trends that Ridenour expects to continue into 2023. Interest rates, he said, are likely to remain high in the months ahead, material prices aren't likely to move downward and raw material supplies could be tight, making deals more risky and less appealing overall.

Further, investments in current operations likely look especially good now given the geopolitical uncertainties that have taken root, particularly across Europe following Russia's invasion of Ukraine.

"The one thing that would be worrisome (in 2023) is a broadening of the conflict in Europe and the implications it would have on the supply of rubber, plastics and the supply of power as well," Ridenour said. "… It is difficult to foresee what the consequences of those are, but certainly it is going to restrict and make it more difficult to supply and make raw materials that supply the products.

"The widening of global conflict beyond what it is right now, which is at least fairly localized, could be a real issue. That's a real variable. And it's a dangerous one in my opinion."

To a large degree, these geopolitical uncertainties are influencing the amount of M&A activity across Europe, manifested in the sense that the uncertainties are curtailing deals—especially given the economic impacts of the war in Ukraine.

At the same time, though, the geopolitical and economic climate in Europe is turning a favorable spotlight on U.S.-based firms.

"I've talked to my European friends and my European partners … and they have all said from an M&A standpoint—the exact quote was: Europe is flat on its ass," Ridenour said. "(Companies) are looking into the U.S. as a superior place to invest, even though the United States is volatile as I said before, but it's still a much more attractive market for them."

As with anything in life and business, there are outliers. And that's true when it comes to mergers and acquisitions.

As many manufacturers take a break from buying, private equity firms are likely to stay engaged throughout 2023.

"I think private equity groups are going to remain in the market strongly for a number of reasons," Ridenour said. "No. 1, despite the fact that the stock market has taken a tumble—not as bad as it could have taken—there is still a lot of excess cash out in the marketplace. And they are predisposed to invest money, not only because that's their business—to take their fund and investment—but they also receive a carried interest on it."

In the end, though, there may be fewer options available for purchasing.

Because even as the economic pressures weigh on smaller firms, they aren't going to be quick to put out the "for sale" sign. Companies that could be prime targets for acquisition likely will do their best to stay afloat and hold out for a more competitive market.

That said, though, those companies looking for a great deal in a market where many are standing on the sidelines may be hard-pressed to find it. Because while the market may not be perfect—and even though there may be fewer players looking to make a purchase—prices aren't coming down all that much.

"I've seen prices remain just about as high as they were last year, but there are far fewer competitors in those deals," Ridenour said. "It has been a bizarre situation."

Ultimately, though, things should cool in 2023.

"I think we are due for some business slowdown in M&As," Ridenour said. "I think the prices are going to move down ultimately as interest rates remain high—but not by much, maybe a multiple."

Of late, Ridenour has seen rubber-related acquisitions closing at one multiple lower than those in the plastics industry. That would put the sales of molded goods deals anywhere from 3 to 4 times adjusted EBITDA at closing for deals below $10 million, all the way up to 5 to 7 times EBITDA for deals greater than $100 million.

Similarly, deals involving compounders have been running at multiples about 5 to 5.5 times EBITDA for the smaller deals, and 9 to 10 times for those over $100 million.