M&A Activity: Keep Your Eye on the Ball

Feature Interview by Dan Beaulieu
D.B. MANAGEMENT GROUP

 

M&A activity is on the rise and shows no indication of slowing down, even if interest rates climb. In the past two years, there were more than 45 deals. Where does your company fit in? In this interview with Dan Beaulieu, M&A expert Tom Kastner breaks down the market and who benefits most when it comes to buyers, sellers, and where you live.

Dan Beaulieu: Tom, please tell us a little about yourself and your company.

Tom Kastner: My firm, GP Ventures, is focused on M&A advisory services for tech and electronics companies. I started the firm in 2008. My background is in the PCB and electronics industries, having worked for Hakuto, a manufacturer of cut-sheet laminators. I worked for them in both operations and strategic investments. GP Ventures now has five people—four in Chicago and one in Japan. We work on both sell-side and buy-side projects.

Beaulieu: Tell me about some of the deals you have done in our industry.

Kastner: I have completed over 10 deals in both the PCB and the EMS industries. We are currently working on several sell-side and buyside deals at the moment.

Beaulieu: What do you see right now when it comes to M&A activity in North America? Why is there so much action?

Kastner: There is a lot of activity in the sector. I believe the main reasons are 1) an abundance of capital available for deals; 2) low interest rates; 3) the average age of owners is at or above retirement; 4) buyer confidence in manufacturing in the U.S. due to reshoring and government policies. This is a lot of activity, especially considering the COVID pandemic and travel restrictions.

According to our records, in North America there were 13 PCB deals in 2021 and nine in 2020. For the EMS sector, there were 24 deals in both 2021 and 2020. I think that the number of deals in the PCB sector will be around the same in 2022; there would be more, but there are fewer and fewer shops to buy. In the EMS sector, I expect the number of deals to be above 30.

Beaulieu: Is there interest in other countries buying in North America? Asian or European companies?

Kastner: Yes, we are seeing a lot of interest from European companies. Not so much from Asian companies yet, mostly due to COVID.

Beaulieu: How does the current legislation in Congress, which seems to be targeting semiconductor manufacturing, affect the PCB fab and EMS providers? How might governmental investment into our market change the M&A landscape?

Kastner: I’ve heard from a lot of buyers that they are bullish on the current direction of U.S. manufacturing. My feeling is that if even a small portion of the market comes back to the U.S., that would be a big lift to U.S. manufacturers. As long as the pending legislation and policy changes encourage investment, it would be a positive for both U.S. manufacturers and M&A activity.

Beaulieu: What kind of deals are happening? Is this a buyer’s or a seller’s market?

Kastner: I think it is a seller’s market for “larger” deals (above $20 million in revenue or so) especially if the seller’s company is profitable and does not have many issues. It is more of an even market for smaller deals or for under-performing companies.

Beaulieu: Who is doing this buying? Are private equity groups involved? Are money people buying into our industry?

Kastner: Private equity groups were involved in most deals in 2021 in both the PCB and EMS industries. This is a strong vote of confidence in the industry, and I expect this to continue for some time.

Beaulieu: What advice would you give to someone who is trying to sell their company?

Kastner: Preparation and education are the big keys for getting a good deal and having it go smoothly. Owners should work with their advisory team, such as their attorney, CPA/ tax advisor, wealth advisor, and M&A professional.

Beaulieu: Same question but for buyers. What advice would you give someone looking to buy a company?

Kastner: Sellers are inundated with calls and e-mails from potential buyers, so it is important to try to stand out from others.

Beaulieu: I hear a lot about rollups or consolidations. Please explain what those are and how they work?

Kastner: That generally refers to the situation in which the buyer moves the seller’s business into the buyer’s. This typically happens with smaller deals, but it can happen with any size deal. It also usually happens more when the two businesses are geographically close and when the seller is performing below average. It can be a great way for a seller to get more for the business since the buyer may be willing to pay more than if they had to take over the seller’s facility.

Beaulieu: How do you see the future? Is this trend going to continue?

Kastner: I think the current conditions will last for some time, at least a year or two. PE firms continue to raise funds, interest rates may rise but should still be relatively low, the economy continues to chug along, and government policies are both providing extra stimulus as well as incentives to increase U.S. manufacturing.

Beaulieu: Any last comments?

Kastner: Just a few comments on the direction of the industry. Both the PCB and EMS industries look like they will continue to consolidate. The acquiring companies will be stronger, larger, more professional, and capable of investing in equipment and technology. Smaller companies will need to focus more on niches and customer service to survive. Larger, public companies are looking to diversify to grow, so there is a fair amount of opportunity for companies in the middle who are looking to take advantage of the re-shoring and consolidation that is going on.

Beaulieu: Very good information. Tom, thank you for your time.

Kastner: No problem, Dan. My pleasure.

Originally published in SMT007, March 2022.