Our Sites

Metal fabrication meets a seller’s market

Investors turn their attention to a long-overlooked business

A funny thing happened during last year’s Super Bowl. Manufacturing was cool again. That’s when Walmart aired a commercial to promote its pledge to spend $250 billion over the next decade on products made or assembled in the U.S.

Last year Cindi Marsiglio, vice president of U.S. manufacturing at Walmart, showed that commercial during her keynote at FABTECH® in Atlanta, where she referred to the retailer’s initiative as a “$250 billion purchase order.”

At the same tradeshow, Doug Nix, vice chairman of Corporate Finance Associates in Oakville, Ont., Canada, said that “there’s an incredible amount of liquidity—that is, cash—in the system. Excluding bank and insurance companies, corporate balance sheets in the S&P 500 have $1.5 trillion. That’s not borrowing capability. That’s cash. And private equity has something on the order of $1 trillion to invest.”

Match all this liquidity with a manufacturing image that’s brighter than it’s been in years, and you get a seller’s market in metal fabrication—but only for the right seller. High revenue concentration, a shallow talent pool, poor cash flow, reliance on sales from a single sector, and other factors still throw up red flags.

Such problems still aren’t unusual, either. In the “2014 Financial Ratios & Operational Benchmarking Survey” from the Fabricators & Manufacturers Association International® (FMA), many fabricators said that on average they received 80 percent of their revenue from just four or five customers, and that average hasn’t changed much during the past three years. As OEMs parse their supply chains, they send more and more work to their preferred suppliers, who expand as fast as they can just to meet the increasing needs of their current customers. With all that work, who has time to diversify?

Still, a preferred supplier is obviously doing something right. According to several sources, both on the buy side and in investment banking, every case is individual. Regardless, unlike six years ago, the environment is ripe for deal-making.

“We deal with the middle market, with companies that have enterprise values between $25 million and $250 million,” said Rick Herbst, a Chicago-based partner at Sikich Investment Banking. “In that arena, where you have a good-performing company, there is absolutely no shortage of potential buyers.

And the funding climate is very positive for asset-intensive businesses like metal fabrication.”

Although Herbst declined to name specific EBITDA multiples, each of which depends on the situation and goals of the buyer and seller, he did say that for quality sellers, he expects demand from buyers to continue in the near term. “Eight to 15 companies are going to be actively looking and bidding on those types of deals.”

What’s Old Is New Again

Ryan Mifsud finds the current investment environment a little amusing. As executive vice president of The Mifsud Group, an organization that owns and operates several metal manufacturing companies, he’s grown up in the business. “People now seem to be viewing manufacturing as this new, unique area, as if it’s this up-and-coming part of the economy,” he said. “From our perspective, it never went away.”

Oscar Mifsud, Ryan’s father and the group’s founder, helped lead SMR Aerospace, previously part of BF Goodrich Aerospace, to 10 years of growth before selling it to B/E Aerospace in 1998. That same year Oscar launched The Mifsud Group, which today owns TMG Performance Products LLC, a manufacturer of high-end aftermarket exhausts, air intakes, and related products in the automotive and marine markets; and as of November 2014, a 100-plus-employee custom fabricator called Montana Metal Products (MMP). The purchase came about after Mifsud’s 2012 divestiture of Aero Instruments, a Cleveland air data sensor manufacturer that’s now owned by AeroControlex.

“Because Mifsud had recently divested a company, it had some capital to put back to work,” said Herbst, who was the buy-side adviser for the transaction.

MMP’s 98,000-square-foot plant in Des Plaines, Ill., employs more than 100 people and serves the aerospace and medical equipment sectors. The new Boeing 787 and 737 passenger jets feature many of the company’s products.

Specifics of the deal weren’t disclosed, but what drew Mifsud to MMP in the first place? As Ryan put it, “We saw a business that had great capabilities and offered unique products and services, and it had a workforce that we believed in. We feel it really has potential to grow.”

According to Ryan, MMP did not have customer concentration problems, and its reach into aerospace and medical equipment diversifies the customer base over the entire group. So what about the “unique product and services” consideration? As a custom fabricator, MMP doesn’t have a proprietary product line, and it uses commonly available machines, including a laser cutting system and punch presses, more than two dozen machining centers (a few have automated pallet loading and bar feeding), and a powder coating line.

“The company does extensive machining, metal fabrication, and coating,” Ryan said. “It has all three of these capabilities within one organization. We view that as ‘the product.’” He explained that this combination, along with its ability to perform value-added processes such as assembly and inventory management, really gives the company a competitive advantage and, because of that, made it an attractive buy.

Avoiding Commodity Providers

MMP’s combination of technology and services helped it avoid being looked at as a commodity. So how does a buyer ensure a fabricator’s service isn’t viewed as such? After all, a fabricator with a proprietary, custom-built machine has an obvious competitive advantage; it’s a trade secret you can actually touch and feel. But what about other situations, those in which the combination of nonproprietary machinery and special services sets the company apart?

As with anything in business, it goes back to the numbers. “One way to tell if a company is differentiated is the gross margins that it’s able to get,” Herbst said. “We then tend to dive deep into those [high-margin] jobs, and we usually find there’s some type of joint engineering that has taken place around those components … Arguably, the [custom fabricator’s] customer could give the same project to another company, but there’s a big learning curve, because of the knowledge that has gone into perfecting what they do.”

Subtleties Behind Revenue Concentration

As Herbst explained, there’s more to revenue concentration than numbers and percentages, or how many customers from how many sectors make up such and such revenue. A fabricator may serve dozens of customers in different markets, but whether this is good or bad depends on a host of other factors. How healthy are the customers? How much collaboration—engineering, supply chain, or otherwise—occurs between the fabricator and OEM? Which of the OEM’s products are the fabricator’s parts for, and where are those products in their life cycle? What’s the future of the product or product category?

A fabricator may have hundreds of customers in different industries, but if many of those products are nearing the end of their life cycle, or if the markets themselves don’t have a bright future, all the diversification in the world still may not make a fabricator attractive to a buyer.

“We try to understand the nature of the sectors [custom fabricators serve], the customers within those sectors, and the importance of the products to those customers,” Herbst said. “What is the competitive bidding process for new sales? We go through a variety of business fundamentals, and the composite of it all has to look appealing to a buyer.”

He emphasized having a “close relationship” with a few large suppliers doesn’t help a high-revenue-concentration problem, at least for a stand-alone buyer. But if that buyer is part of a larger organization, the story can change. A fabricator with customers highly concentrated in one sector may be attractive to a buyer with multiple divisions having customers in a range of other sectors, especially if the fabricator’s one sector complements the buyer’s business in some way. The sector may have a business cycle that evens out demand for the buyer (as one sector slows, another picks back up), or it may help the buyer extend its reach into a certain market.

Company Size

“I think we’re going to see some consolidation,” Herbst said. “There is a lot of rationalization around consolidation in certain areas.”

He added that though consolidation will be a trend, and even though the mergers and acquisitions (M&A) environment is extremely healthy for metal fabricators, business size still matters. “It is very hard to sell a business when you’re dealing with less than $5 million in revenue.”

There are exceptions. For instance, Dane Manufacturing, a stamper and metal fabricator based in Dane, Wis., closed two small acquisition deals in 2008 and 2009, not the most “lender-friendly” of times, bolting on companies that had between $1 million and $2 million in sales. Dane made the deals to expand its customer base and gain a foothold in new markets.

Still, in general, company size makes a difference. According to What’s Your Business Worth?, an e-book published in 2013 by FMA, “Virtually every valuation analyst and prospective buyer/investor has arrived at the conclusion—more accurately, the perception—that size matters. Large companies, all else being more or less equal, are viewed as less risky than smaller ones.”

Difficult to Replicate

“Talent is very hard to come by in any industry today,” said Ryan of The Mifsud Group, “so we look for companies that have good talent, a group of people that we can build on.”

Some considerations regarding employees haven’t changed over the years. The CEO or just a few senior managers micromanaging everything isn’t a good sign. Ideally, knowledge and talent should run deep into the ranks of an organization. A shop held together by just one person is never a good thing.

But as Herbst explained, automation also factors into the equation. “If there’s knowledge concentrated among only a handful of people, but there’s also a lot of automation and, most important, a lot of knowledge embedded into the automation, that’s by no means a negative. That’s because these companies often are very efficient, and often are cost leaders.”

He emphasized that, like most things in M&A, available talent depends on the business. For instance, a shop that employs a core group of experienced welders or other craftspeople—“artisans,” as Herbst put it—can also be attractive for a buyer. “The products these artisans produce can bring in very high margins, because they’re very difficult to replicate.”

In fact, “difficult to replicate” may sum it all up. If a business has attributes—be it technology or talent—that are difficult to copy, a buyer may well be interested. After all, manufacturing is cool again.

About the Author
The Fabricator

Tim Heston

Senior Editor

2135 Point Blvd

Elgin, IL 60123

815-381-1314

Tim Heston, The Fabricator's senior editor, has covered the metal fabrication industry since 1998, starting his career at the American Welding Society's Welding Journal. Since then he has covered the full range of metal fabrication processes, from stamping, bending, and cutting to grinding and polishing. He joined The Fabricator's staff in October 2007.