M&A surge rounds out busy 2021

Deals happen when the right pieces—and right price tags—fall into place. And as 2021 comes to a close, it looks as though the pieces and prices are coming together for quite a few companies.

A flurry of mergers and acquisitions have been reported by rubber industry companies in recent weeks, and, according to a pair of economic experts, it's likely to continue through the end of the year.

Bill Wood, founder of Greenfield, Mass.-based Mountaintop Economics & Research Inc., cautions against looking too deeply into trends behind the M&As and making too many connections to the COVID-19 pandemic. Sometimes, the uptick in M&A activity is just that, an uptick.

"What is causing all the M&As? The fact that there is a lot of M&As," Wood said. "It can be a self-fulfilling prophecy."

And that could be the case right now as favorable market trends and an influx of capital influence buying and selling decisions. It's all part of an economic cycle that creates ideal moments for M&A.

"Money and access to money at the present time is cheap, and access is relatively easy," Wood said. "If you have leverage, you can go out and borrow money at relatively low rates, and by that, I mean the interest rates, as we know, are low.

"And what are you going to do with the money? … You can invest in new equipment or you can invest in buying a whole factory, buying the whole shop. Because if you have cash, and a lot of people do have a lot of cash—there is no shortage of capital in the country—you can't put it in the bank and make anything," Wood said.

"The stock market is pretty high, you can't buy back your own stock a lot of times anymore, they have done that. And multiples are really pretty high on the market, so if a guy is selling his company, you are going to look hard at it. … All of these financial and economic things point to the idea that now is an auspicious time to make a deal."

All considered, it's tough to say that the COVID-19 pandemic and the effects it has on global business—and the rubber industry, specifically—is playing the key role in the recent surge of M&A activity, Wood said. He believes that factors traditionally influencing buyers and sellers remain steadfast: Companies are looking for strategic acquisitions, and they are looking to scale up.

What the pandemic did do, though, is shine a bright light on companies' vulnerabilities, and this has helped businesses better identify what acquisitions will make them stronger. This also may help businesses be a little more aggressive on the acquisition front, particularly with today's favorable market dynamics.

"These ideas tend to percolate up when markets are under stress," Wood said. "… When everything is good and you are just cruising along, I don't know that it motivates this kind of thinking. But when you are under stress and you have to do better, something has to happen."

And that's where the pandemic factors in.

Another of the pandemic's peripheral impacts lies in supply chain entanglements.

"One of the things we recently found out—and you know how we have this whole supply chain issue—if you look really hard under the covers, the companies with scale—the ones with clout, the ones who have leverage over the suppliers or buyers—they have fewer problems," Wood said. "… So if you are waiting for a container and you have just one container and it is at the bottom: OK, it's going to stay at the bottom. But if you have scale, you just call up and say, 'it's not waiting at the bottom, it's going now.' "

And that's how scaling up through acquisition can give companies more leverage or diversify their global footprints to shorten the supply chain.

Bill Ridenour, owner of Foxfire, N.C.-based Polymer Transaction Advisors Inc., has a clear view of the industry's M&A landscape as he helps his clients find the right opportunities to buy and sell.

Industrywide, there are certain sectors that are more appealing than others, particularly to private equity firms. Companies in the medical and pharmaceutical spaces remain the most appealing targets.

"Whenever we have people call us, they ask if we have a pharmaceutical or a medical company to sell," Ridenour said. "We seldom do because so many of them have been bought out."

Additionally, he said, companies serving the electronics end markets remain coveted.

Perhaps the most interesting space where M&A interest is taking root is in the supply chain space, where supply chain management companies have begun to take off. They operate, Ridenour said, almost in the distribution space, but not entirely.

Supply chain companies work with clients to secure needed raw materials at the best possible prices and then offer warehousing space to expand the available supply of needed materials should a client's supply chain see disruption.

"The benefit to the customer," Ridenour said, "is that they get the best price, favorable sourcing when there is a shortage and they also have the further advantage of being able to warehouse additional inventory in case something should arise at a supply chain company's plant."

So why now? What is it about 2021 that makes it a good time to buy and sell? Ridenour believes that possible changes to tax laws could be influencing some of the year-end activity.

Discussions about increasing tax rates—or eliminating the capital gains tax—continue to move forward in Washington, he said, and any action taken to this end could hinder companies' decisions to grow through acquisition.

"If the tax increases occur, it will bring down prices on acquisitions because you won't be getting the after-tax proceeds out of it that you might normally get if you are a private equity group," Ridenour said. "So that is why there is a big rush to get the deals done at the end of the year."

Ridenour does believe that M&A activity will continue into 2022, saying the uncertainties surrounding tax policies are likely to impact prices more than the number of transactions.

"One thing I do prophesize is that there will be fewer people in the marketplace," Ridenour said, "which is why the prices will drop. There will be less competition to push the price up. Because so many people are getting so concerned about the future, they are going to hunker down and try to wait and see what happens before they put their money into an investment."