Also, using another measurement, which includes a wider range of companies, including all safety and environmental, based upon statistics through June of 2013, M&A activity seems likely to be up a full 30% for 2013.
Why safety is hot
Why the big volume of M&A interest?
First of all, all M&A activity is rising in part because there is simply a huge amount of money available. Our firm has been selling private companies for 22 years now. Ten years ago, we almost never sold to the equity fund markets, simply because they were seldom competitive in pricing. Today they are, and they have multiplied like mad! Ten years ago we had fewer than 300 companies in our database that we felt were legitimate equity fund buyers. Today we have more than 2,500! And in recent years they ARE competitive in pricing, and are very viable forces in the marketplace.
The safety segment in particular benefits consistently from continuing increases in regulatory, environmental, and labor restrictions – like the OSHA, DOL, and EPA influences. Corporate compliance with rules and regulations is costly, but necessary.
And there is no reduction of oversight expected. Obama just signed an executive order in August, 2013 aimed at improving chemical and facility safety. Walmart just settled in a suit with the DOL making a commitment to improve health and safety conditions in 2,857 stores. Corporate exposure continues to increase.
Buyers also like the safety industry because the nature of expenditures tends to be regularly recurring. Most expenditures aren’t capX, or one-time investment. Customers tend to be consistent repeat buyers, over a long period. The company with steady recurring business from a solid base is always a more secure investment.
Safety markets can be somewhat difficult to enter – which provides a substantial benefit for buyers, if they are able to acquire the established player. Some segments require pretty strong technical expertise and background. Almost all safety business requires establishment of a wide and deep customer contact base – and customers are usually wide-ranging and diverse – so they are not easy to assimilate.
The acquisition markets also like the industry because there are a fairly large number of closely held mid-sized companies, which are likely to need help to grow. Many second and third-generation owners like the notion of exit, and would prefer to cash in rather than reinvest in adapting for the future of the business.
Lastly, international acquisition interest has increased enormously. Safety is clearly a world market today, and companies in the U.S. have a reputation for quality and reliability. Also, in much of the world, the U.S. is still slightly ahead in standards and even in social mores with respect to safety requirements for employees.
Safety values
With this sort of appetite, owners often come to us asking about values. Values have trended very well, along with rising buyer appetites. One concrete indicator of value is a look at the public companies’ trading values. Trade values today are around 125% of average values over the past five years. This indicates great trending, with the peak of recent history very clearly being today.
The large transactions over history have shown outstanding prices. When 3M bought Aearo in 2008, they paid $1.2 billion, when Aearo was just $508 million in sales. At about a 2.3 x sales pricing, that was stupendous. That was close to the time that Honeywell bought Norcross, followed a few years later by acquisition of Sperian. There are few multi-hundred million dollar targets out there today for such acquisitions, but pricing is still excellent. And many buyers actually feel that mid-sized players thrive even more in competition with the giants – so it can actually be a plus for the values of smaller companies to have a handful of the huge power-players in your industry.
Mid-sized and smaller players go for more modest prices, but the safety industries today are far ahead of most industries. The low edge pricing for the smaller player with profits is probably a 5 multiple (of pretax earnings). At the higher end, companies may go for more like a 7-8 multiple. Also, if there is particular focused strength in the company, with for example a great reputation in one particular segment, or perhaps with proprietary or patented products to solve a special need – all “normal” multiples fly out the window, and the market pricing is determined purely by competition.
Factors that increase value
Middle market companies often try to look at what helps create great value, to identify where they need to build, for ultimate top pay-back.
The first obvious determinant of value involves profitability of the venture. High profitability is always an important strength. The average player in the safety arena has profits that may range from 6-10% of sales. North of 10% is strong, special, and valuable.
Buyers like business that has a high resistance to new incoming competition. Respiratory equipment and fall protection equipment is more difficult technically, and has special regulatory considerations, which offers protection against incoming competition. Fire-resistant specialty products are also good. Fabrics with special properties to resist tears or other damage can be desirable. Any obstacles to new market entry can help value. (We just sold an eye protection company with focus upon prescription eye protection. The unusual difficulty for newcomers trying to enter that market made value strong.)
Buyers also target special penetration with niche customer groups. (Again, adds resistance to incoming competition.) Power-house reputation, especially within an industry that’s on the upswing, is great. Long-term, steady historical growth bodes well, and boosts buyer confidence. Segments with difficulty for foreign competitors (products that need quick turn-around, or tailored processing - hard to beat from great distances) are strong. All of these special attributes, that make the company above average in some “niche” way pay off in value.
Conclusion
Business people with ownership or management roles in the safety industry are in a good position today. Opportunities for growth through acquisition are strong. Exit potential for the would-be seller is outstanding. Incoming capital is always a great sign for the future- and probably almost guarantees a good decade to come!