Consolidation in metal fabrication: horizontal, vertical, or both?

Recently one large fabricator just got a lot larger. BTD of Detroit Lakes, Minn., paid $30.5 million in cash for Dawsonville, Ga.-based Impulse Manufacturing.

This is the latest in a string of large acquisitions we’ve seen in recent years. We’ve seen large fabricators buy other large fabricators, like when Mayville Engineering Co. (MEC), the contract manufacturing giant in Mayville, Wis., bought Michigan-based Center Manufacturing back in 2012. This kind of “horizontal” buy expands a fabricator’s processes and customer base.

We’ve also seen companies “go vertical” and buy firms one step down the supply chain, like when metal service centers buy custom fabricators—such as when Reliance Steel & Aluminum Co. purchased Fort Payne, Ala.-based GH Metal Solutions, now part of Reliance’s Feralloy Corp. business unit. In these acquisitions, the service center parent company usually has the custom fabrication division operate as separate businesses. Think Iowa Laser, O’Neal Manufacturing Services, and parent organization O’Neal Industries (ONI), which also runs O'Neal Steel. Others are acquiring companies with seamless vertical integration in mind. Think Walker Stamping and Millenia Products Group.

And we’ve seen numerous smaller purchases, including venture capital firms and other financial buyers building diverse manufacturing portfolios. A&E Custom Mfg. was recently sold to Bennett Tool & Die, which is owned in part by venture capital firm KVCI.

So what’s driving these investments? Money is cheap these days, to be sure, but what’s the strategy behind it all?

In the 1990s and early 2000s, I recall talking to a lot of shop owners about quick service. A lot of shops back then specialized in just laser cutting. Few shops had lasers early on, so if you had a laser, the work would come in—no worries. As the technology matured, more of these laser cutting shops set themselves apart with speed, with same-day or next-day service.

Today I see different trends emerging in the U.S. market. Fabricators seem to be bringing in more and more processes, either through direct machinery purchases or via bolt-on company acquisitions (which also help expand a fabricator’s customer base). It’s common to hear about a fab shop owner buying a small machining operation down the street, for instance. I also see more shops offering complete subassemblies or assemblies. Piece-part work is still there, but at many fabricators, it’s not as common as it once was.

Of course, when you push more manufacturing processes (as well as engineering services) down the supply chain, you increase risk. If a laser cut part doesn’t arrive in time, an OEM can find an alternative source or just cut the piece in house. If an entire subassembly doesn’t arrive when it’s supposed to, or if that subassembly doesn’t meet spec, you have a serious problem.

That risk may be pushing more large fabricators to purchase more plants. If one plant has an unexpected demand spike or, God forbid, undergoes a natural disaster, a large fabricator can shift work to another plant.

I find the “vertical” acquisitions—service centers buying custom fabricators (or launching their own)—most interesting. On the surface, you might think such moves might upset the service center’s core customer base. And yet metal fabrication is really just a mature market. Just as Apple uses Samsung components in its iPhone, fabricators purchase metal from a service center that may also be a current or potential competitor. Similarly, some OEMs may choose to purchase fabricated components from a custom fab shop owned by a service center.

The people buying fabricated metal products do whatever makes business sense. Judging by all the M&A activity in recent years, they have plenty of options.