How Consolidation is Poised to Transform the Converting Industry

Posted by Rock LaManna

Consolidation Can Transform the Converting Industry

Fear is a four-letter word in the business world.  It prompts bad decisions, irrational thought, and poor strategy.  However, a little fear might be in order for owners who aren’t taking any type of strategic action in light of the consolidation occurring in the converting industry. 

I recently spoke with Tom Blaige, of Blaige & Company, about an impending trend that many owners of converting companies are either unaware of or are intentionally ignoring: The rapid consolidation taking place in the industry.

Blaige’s company specializes in mergers and acquisitions, and he explained the results of his “Twelve Year Plastics & Packaging M&A Consolidation Study (2001-2012).”

The study focuses on the seven major processing segments and key end markets of the plastics industry.  Blaige and his team focused on the M&A activity in the market, analyzing transactions and deriving some conclusions that I found to be extremely eye-opening, and perhaps unnerving to many owners.

The study revealed that the converting industry is experiencing the type of consolidation other older vertical industries have already undergone, and that without a strategic plan for dealing with this new world, your business faces significant and even lethal challenges.

What Consolidation Looks Like

According to Blaige’s study, “58 percent of the top 50 US players across all plastics manufacturing segments have either been eliminated or changed ownership (merged or sold) since 2001.”  This level of activity is relatively new to the converting industry, not surprising considering plastics and packaging is a relatively young vertical.

“Young” as in circa World War 2, which marked the start of composite materials, in which wartime shortages spurred research into plastics.  It has since grown to become the third largest manufacturing industry in the United States.  Because of its youth, it has not experienced the consolidation experienced by industries such as glass bottles and metal cans.  However, “history will repeat itself,” Blaige forewarned.

What’s driving the current consolidation in the industry?  Blaige attributes three causes:

  • Globalization:  As brand companies expand their market share globally, they’re expecting suppliers to have a global reach as well, which is why M&As among international participants have risen.  According to Blaige’s findings, “International-only deals have increased from 40% of all M&A deals in 2001 to 45% in 2012, reflecting an ongoing trend toward globalization in the past decade.”
  • Fragmentation:  The industry is heavily fragmented, and it’s only natural that consolidation would occur.  For example, there are 1,450 US plastics processors.  Large processors, with sales north of $500mm, comprise 3% of the market.  Mid-size companies, with sales $50 to 500 million, make up 19% of the market.  That leaves 78% of the market to companies under $50mm.
  • Money to Burn:  Despite the recession of 2008, funds committed to private equity investment grew rapidly. “The amount of un-invested private equity capital has grown nearly tenfold over the past decade to a staggering $432 billion.”  Private investors are now accessing that cash and fueling M&A activity.  

As a result of these trends, Blaige sees three distinctive market segments that have emerged:

Leaders – The top 10-20% of companies who maintain the leadership status through aggressive M&A strategies, which include the best acquisitions and selective divestitures.

Followers – The next 10-20% of the industry who are rapidly losing market share and will be required to go through restructuring and/or divestitures.

Others – The remaining 60-80% of the industry, who isn’t doing much of anything.  They’re sitting still, relying on the way “things have always have been done,” and are ignoring the impending consolidation that’s creeping across the converting landscape.

Why should you be alarmed?

Many of the “Others” that Blaige refers to are businesses under $50 million.  These tend to be family businesses that strategically operate based on “the way we’ve always done it.”

Blaige doesn’t deny the fact that these converters may be experiencing success today, but that doesn’t guarantee positive results for the future, or any type of immunity from adverse economic conditions.

The LaManna Alliance is all about letting your numerics drive your strategies.  One numeric that particularly caught my eye was Tom’s recommendation that businesses grow to $100 million to survive and thrive in the new marketplace.  Why that $100 million?  The number seemed relatively arbitrary to me.

Blaige pointed to several noteworthy trends to explain his recommendation.  Among the top 50 players that have not merged or sold, those with access to private equity, public market or corporate capital are on average 3.4x larger than their competitors.  These bigger companies are much more likely to weather economic shocks and survive for the long run.

Second, Blaige recommends the $100 million mark because of the trends revealed in the study.  “If you get to the $100 million, you are bigger than 90% of the universe, and you’re going to be more solid,” he said.  

Through M&As, that mark is much more attainable than smaller companies realize. For example, if you’re a $30 million company, two mergers with comparable-sized companies suddenly propel you to that coveted $100 million mark.  

The possibilities are endless as to how that type of M&A activity would occur, and whom it would involve.  You could choose an M&A with a competitor or someone in your supply chain.  You could also sell part of your business to an institutional investor, and let them use their acquisition team to find add-on businesses to generate more revenue.  

The possibilities are endless.  But the time to plan and execute a strategy is not.

While Blaige can’t pinpoint exactly when and where consolidation will occur, there’s no denying that things move fast in the business world.  “You might wake up one day and your competitor will have taken over 40 percent of your business because an M&A suddenly gives him a global footprint,” he said.  “And your clients are all too happy to jump ship.”

So what to do?  Owners have three choices, Blaige says:  “Acquire, merge or sell.”  
Clear-cut choices.  But do you have the strategy in place to choose the option that’s right for you?

Topics: Converting Industry, Strategy