Middle-Market M&A Quarterly Review, May 2012
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Middle-Market M&A Quarterly Review, May 2012

Deal Activity

During the first quarter of 2012, there were 214 reported transactions of companies that sold for up to $100 million. The second half of 2011 was soft for M&A transactions and the trend seems to have continued into 2012. When compared to the most current quarter, there was a flurry of activity in the first quarter of 2011, as there were 395 companies that changed hands that were sold for under $100 million.

We looked at three segments of transactions over the last four quarters: deals below $25 million, $25 to $50 million, and $50 to $100 million. In the first quarter of 2012, M&A activity decreased for deal sizes up to $100 million. Deals $25 million and below experienced a substantial decline as the total number of reported deals dropped from 200 in the fourth quarter of 2011 to 131 in the first quarter of 2012, a decrease of 35 percent. Aggregate deal volume fared better, but was still down by 24 percent.

Transactions in the $25 to $50 million range had the biggest decrease, as there were 68 deals with an aggregate value of $2.4 billion in the fourth quarter as compared to 43 deals with an aggregate value of $1.5 billion in the first quarter of 2012. Both decreases indicated a total decline of 37 percent.

The activity for transactions in the $50 to $100 million range fared slightly better, though both the number of deals and aggregate deal value fell by 20 percent. Total number of deals went from 50 to 40 deals and aggregate value went from of $3.5 billion to $2.8 billion.

 Source: Factset
Overall, the second half of 2011 was weak with the number of companies sold falling to their lowest levels since the third and fourth quarters of 2009. While the first half of 2011 showed signs of optimism, the pace of deals slowed over the summer due in large part to the European debt crisis. The number of deals in 2011 was higher than 2010, 2009, and 2008, yet the first quarter of 2012 might indicate that the upward trend has stalled.


We were able to analyze 155 transactions that occurred over the trailing 12 months ended March 31, 2012. Deal sizes ranged from $1 million to $100 million. We found that the average size (in revenues) of the companies involved was $21.2 million. The implied unadjusted EBITDA multiple for the companies involved in these transactions was 8.0 times. Of these transactions, 59 percent occurred in the second and third quarters of 2011, which we know was a strong period for deal activity.

Of the 155 transactions we looked at, 48 were of companies that were engaged in manufacturing. The average size in revenues of these manufacturing companies was $19 million. The implied unadjusted EBITDA multiple for the companies involved in these transactions was 8.7 times, a little higher than the market in general.

Generally speaking, an EBITDA multiple of 8.0 times is fairly strong, especially for companies at the lower end of the revenue range. Healthy multiples can be attributed to many different factors, but some of the big drivers could be the company’s becoming leaner and more profitable, difficulty in achieving organic growth, and greater competition amongst buyers.

Timing plays a role for sellers in maximizing value a seller receives for his company. There are, however, a lot of other important considerations in determining whether or not to sell. Pat McNally recently published an article in Manufacturing Today that tackles this very subject.

Manufacturing-Sector Update

According to the Manufacturing ISM Report On Business, economic activity in the manufacturing sector expanded in April for the 33rd consecutive month, and the overall economy grew for the 35th consecutive month. The most recent PMI reading, in April, was 54.8, an increase of 1.4 percent from March's reading of 53.4 percent, indicating expansion in the manufacturing sector. A reading above 50 implies expansion of manufacturing activity. Of the 18 industries included in the survey, 16 are experiencing overall growth. Read a full copy of ISM's report, visit ism.ws.


Industry Snapshot


Metal Fabrication

The majority of fabricated metal products manufacturers are located in Illinois, Ohio, Texas, California, Pennsylvania, and Michigan. However, the industry is highly fragmented with many subsectors, such as machine shops, so there is significant metal fabrication activity in most parts of the country.

The ISM index has indicated that manufacturing activity has expanded, and there has been recent mergers and acquisitions (M&A) activity in the manufacturing sector. Given the prevalence of metal fabricators and related businesses, we thought it would be useful to look at some of the financial metrics that are observed in the industry. We believe that it is always helpful to know how you stack up against your peers. The following is some selected benchmarking data for metal fabricators:

Income Statement
Gross Profit​ 32.0% ​
Operating Expenses​ 27.0% ​
Operating Profit ​
All Other Expenses (net)​ 1.0%​
Profit Before Taxes​ 4.1%​
Current​ 1.8​
Sales / Receivables​ 8.4​
Cost of Sales / Inventory​ 6.8​
Sales / Working Capital ​ ​8.4
EBIT / Interest​ 4.0​
% Profit before Taxes /  Total Assets​ 7.1​
Debt / Worth​ 1.5​
Sales / Net Fixed Assets ​ 8.4​
Sales / Total Assets ​ 2.0​
% Owners' Comp. / Sales ​ 4.2​
Source: Risk Management Associates 2011–12


U.S. shipments of fabricated metal products increased 11.6 percent in the first two months of 2012 compared to the same time in 2011; new orders grew 9.2 percent during the same period. The increase in fabricated metal product shipments and new orders is likely being driven by rising demand for durable goods in general; U.S. shipments of durable goods rose 11.4 percent in the first two months of 2012. Several key end-use markets for fabricated metal products experienced growth in product shipments in January and February 2012, including heavy-duty trucks (shipments rose 46.7 percent), non-defense aircraft and parts (32.6 percent), construction machinery (28.6 percent), automobiles (25.4 percent), and farm machinery (24.6 percent). U.S. steel mill product prices, an indicator of commodity steel costs for fabricated metal products manufacturers, rose a slight 0.4 percent in March 2012 compared to the same month in 2011.

Demand for fabricated metal parts is heavily driven by U.S. manufacturing levels, especially for equipment and machinery. U.S. production of fabricated metal products dropped more than 20 percent during the recession of the late 2000s. A greater reliance on low-cost overseas manufacture has cut the market for U.S. metal products.


Due to the specialized nature of the industry, many companies supply only a handful of products to a few large customers. Many companies in the industry are de facto manufacturing subsidiaries of their customers, and their success depends directly on their customers' success. That said, due to the engineer-intensive nature of many products in this industry, companies can often add significant value for customers (and gain higher gross margins) by concentrating on niche products. However, niche products contain higher risks of obsolescence and customer concentration.

Many metal products customers, such as auto companies and appliance manufacturers, have moved production abroad to take advantage of lower labor costs and to position themselves to sell products to a growing international market. Also, powder metal parts are gaining acceptance. They are often cheaper to produce, and in some cases are lighter or have better performance characteristics than traditional metal parts. The light weight of powder metal parts is particularly attractive in automotive applications: on average, vehicles now contain about 40 pounds of powder metal parts.


New metal alloys have created opportunities for growth. These alloys have desirable physical properties that allow manufacturers to upgrade existing products and introduce new ones. Such alloys have been especially useful for products that must operate in extreme conditions, such as inside engines and in cooling applications. However, the use of new materials requires a large prior investment in engineering and testing.

As machinery and other products become more sophisticated in function and design, the parts used to build them generally also become more complicated, requiring more engineering and tighter manufacturing specifications. In general, these products carry higher margins and those manufacturers benefit that invest in modern fabricating technology.

Many companies are expanding their product line, sometimes adding nonmetal items. Manufacturers of metal windows and doors may also manufacture vinyl and wooden ones. Manufacturers of industrial metal valves may also produce plastic versions for certain applications

Global Insight

As the global economy continues to recover, various segments within the fabricated metal products industry face different challenges and opportunities. Growing economies in China, India, Latin America, and Russia will create growing demand for end-use products with high fabricated metal product content. Construction and overall industrial activity should spur demand in emerging economies for structural metal work, boilers, springs and wire, and forging and stamping. The rise of the middle class in developing areas should also increase demand for beverage cans, cutlery, hand and edge tools, and hardware. Demand for many fabricated metal products should be more modest in the developed economies of North America, Western Europe, and Japan, but in the case of North America, current historically low automotive production and the rising average age of the average motor vehicle could result in increased future demand for fabricated metal products used in the automotive industry.


From First Research’s Industry Profile: Fabricated Metal Product Manufacturing, April 23, 2012.

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Patrick McNally


Stella Su


T.R. Sweinsberger