Viewpoint
What’s it worth?
Figuring value when selling, buying a middle-market business
When publicly owned companies
such as Clariant, General Electric, Akzo Nobel and PolyOne
buy or sell a major business unit, competitors can usually determine from
public records the price and how it was
paid.
By
Bill
Ridenour
The Securities and Exchange Commission dictates that publicly owned companies disclose certain financial details of
larger acquisitions and business sales.
But what about the middle market—
$10 million to $100 million—transaction
that is between two private parties
without the legal requirement to disclose the purchase price? In today’s market where buyers are increasingly private equity groups with no legal
requirement to disclose pricing, such information is often hard to come by and
benchmarking your company’s value is
more difficult than ever.
Today we are in possibly the strongest
acquisition market in our history. The
perception among industry participants
is that the market is now a seller’s market, and that prices paid have never
been higher. In our firm’s recent mergers and acquisitions experience, we can
advise that this is indeed the case; however, there are major considerations that
either can enhance or diminish your
company’s value in the eyes of a buyer.
The question then becomes, if you are
a middle-market buyer or seller in the
plastics and rubber industries, how do
you benchmark acquisition values?
These are a few of the major factors
affecting the value of any company:
● Does it have a pattern of consistent
growth in sales and profits and a coherent business plan with which to sustain
business growth? (Buyers “buy” growth
in earnings.)
● Does it have a proprietary line of
business and/or some technological/
manufacturing and/or sales/marketing
advantages?
● Are its customers and markets
healthy and growing or are they in decline?
● Is the management team strong and
capable of managing a much larger business?
● Is the company in a market niche
that is coveted by others, e.g., medical,
aerospace applications?
● Is it located in a region in which others are seeking to expand?
● Have its financial statements been
audited, and are they without irregular-ities? (Poor financial reporting harms
your credibility with buyers.)
● Is it vulnerable to a loss of business
to Mexico and China?
As a rule, companies with little or no
growth, no business plan, poorly maintained financial statements, poor earnings and ailing customers or end markets sell at lower multiples of earnings
than those without these problems.
As a rule, larger companies also sell
for higher earnings multiples, since buyers usually associate a larger business
with a lower investment risk. But always remember to look at the value factors as they relate to your own company,
as these factors could affect the value of
your company by several multiples of
earnings.
In our firm’s view, the owner(s) of a
privately owned company, or a public
company considering the sale of divi-sions/subsidiaries, should:
● Sell before the end of 2007 while the
M&A market is still strong.
● Benchmark the company’s value using our guidelines. However, we strongly recommend the use of a financial
services firm to assist you.
● Plan to use a competitive bid process
to maximize your purchase price.
● Avoid whenever possible entering
into that friendly one-on-one conversation with a buyer. It could cost you 10-20
percent or more of your potential purchase price.
● Consider that today’s lucrative long-term, top-end capital gains rates of 15
percent upon the sale of your company
may increase substantially following the
national elections under a new administration.
Bill Ridenour is president of Polymer
Transaction Advisors Inc., a mergers
and acquisitions and strategic planning
consulting firm.
Quality woes
Problems with tires, other goods won’t curtail China’s growth
After problems with imported tires,
toys, toothpaste, pet food and
seafood, China has become synonymous with poor quality in the U.S.
But those incidents won’t slow the drive
to source more automotive components
from China. And Chinese auto makers already have to clear high quality hurdles
before they sell cars in the U.S.
The problems with the flawed products, such as leaving out the gum strip
between tire belts—an omission that
can cause the belts to separate—or
adding diethylene glycol to toothpaste,
could have been detected had Chinese or
U.S. inspectors been more thorough.
In the case of automotive components,
as Paul Gao, a principal with consultants McKinsey & Co. in Shanghai,
points out, auto makers monitor their
suppliers’ products carefully.
Indeed, one reason I’ve heard for not
sourcing a part in China is the length of
time it takes to certify local suppliers’
quality. So thoroughness is not a problem.
That’s not to say this recent flurry of
problems with products from China will
be forgotten. It’s bound to sour some
people’s opinions of China-made vehicles and parts.
Chinese auto makers have realized
that meeting U.S. standards is tough
and takes time. Engineers at the auto
makers have said as much to me.
Still, Chrysler undoubtedly will have
to make extra efforts to convince buyers
By
Alysha
Webb
that the cars it will assemble with
Chery Automobile Co. are problem-free
and safe.
Any automotive manufacturer who
has tried to source parts or build cars in
China already knows that quality is a
problem. That’s why they generally
have teams dedicated to supplier development and spend many hours and
much money on worker training.
Some good may even come out of the
bad tires and toothpaste. Companies
looking to source from China will be prepared to do even more quality checks to
avoid costly surprises.
Alysha Webb is the China bureau chief
of Automotive News, a sister publication
of Rubber & Plastics News.
International
Asahi Kasei to add capacity for S-SBR in Japan
TOKYO—Asahi Kasei Chemicals
Corp. is hiking its annual capacity for
solution-polymerized SBR to 62,000
metric tons at its Oita, Japan, facility.
The 10,000-ton expansion at the
plant, operated by subsidiary Japan
Elastomer Co. Ltd., is scheduled to start
in April 2008 and will produce a new,
modified synthetic rubber for high performance, fuel-efficient tires, the company said. The material has been on the
market since April.
The business has been marked for expansion through strategic investment in
Asahi Kasei’s “Growth Action 2010”
medium-term, business initiative. That
program is focused on increasing production capacity and advancing technological development.
Asahi Kasei didn’t disclose the cost of
the expansion.
Thai board approves 3
rubber-related projects
BANGKOK, Thailand—Thailand’s
Board of Investment has approved an
auto parts plant, a nitrile latex operation and an epichlorohydrin facility.
Nishikawa Tachapalalert Rubber Co.
Ltd. will invest $9.9 million for the auto
parts factory in Nakhon Ratchasima.
The Thai-Japanese joint venture will
employ 171, the board said.
BST Elastomers Co. is building the
96-employee, $79.9 million facility that
will produce acrylonitrile butadiene latex and modified acrylonitrile butadiene
latex as raw materials for making rubber gloves, foam and other products. It
will be the first NBR plant in Thailand,
the board said, and will be built in Rayong Province.
Aditya Birla Chemicals (Thailand) Co.
Ltd. received approval to build the
epichlorohydrin unit in Rayong Province.
The project will cost $4.5 million and employ nine, the board said.
In brief
Phillips Carbon Black Ltd. has
signed an agreement with Vietnam National Chemical Corp to study the feasibility of setting up a carbon black plant
in Vietnam…Helvoet Pharma has
started building a factory for rubber closures in Alken, Belgium…Steel maker
ArcelorMittal S.A. has agreed to buy a
majority stake in Rongcheng Chengshan Steel Cord Co., a steel cord and
bead wire maker…Performance Fibers said it will open a European
shared-services center and headquarters in Luxembourg.
