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One of the most popular questions we receive concerns the market for M&A. Here is our take on the current market for PCB shops in North America.
In general, the PCB market in North America is not growing, which means that to grow, shops either must take market share from others, or grow through acquisitions. Some recent examples of growth through acquisitions are APCT’s purchase of Tech Circuits and HT Global’s acquisition of Pho-Tronics. Other alternatives for growth include diversifying into new products, such as flex circuits, or getting into assemblies. Another alternative is to get into offshore boards: Advanced Circuits is a recent example of a shop that has started an offshore group. American Standard Circuits’ acquisition of Camtech is another example of a shop getting into the offshore business. In general, North American companies in the $10+ million revenue space are interested in making acquisitions at the right price.
One trend is that is becoming increasingly urgent is the need to invest in new equipment, training, and certifications to maintain customers. Many shops in North America, particularly those with less than $5 million of revenue, have found it difficult to keep up with investments in equipment and facilities. While it is admirable that PCB shops can survive with old equipment, it is difficult to imagine that those shops will stay open forever without more investment. ITO Circuits is one example of a closure in 2017.
The trends for M&A in North America depend on the size of the shop. Here is the breakdown of PCB manufacturing companies based on our database (this is the number of companies, not shops. For example, TTM is one company. We do not include companies who are 100% brokers, of which we are aware of 14 U.S.-based firms):
- $0 to $5 million revenue: 113 companies
- $5–10 million: 45
- $10–25 million: 31
- $25+ million: 20
- Total: 209 companies
- The state with the most companies is California, with about 70, and the next is Illinois, with 30.
For PCB shops in the $0−5 million revenue range, most buyers are going to want to consolidate the business into their own shop. Since most shops in North America are not running at full capacity, buyers probably do not need another facility. There are some exceptions, for example, buyers who want to diversify into flex or military-related boards, or those who wish to have locations on both coasts and/or a location in a lower wage area.
Typically, sellers in the less-than-$5 million revenue market will receive some up-front payment, but most of the deal will come as deferred compensation, such as a percent of sales over many years. In this scenario, the seller can sell their equipment and building (if they own it), and usually the owner works with the buyer for several years to help with the transition. Although this is not ideal for many sellers, it does eliminate the need to invest in new equipment, maintain the facility, and other issues related to running a business. Some owners have been able to focus on what they enjoy, which is selling to customers rather than the headaches (and risks) of running a shop. Occasionally, there are individuals who are interested in buying a small shop and running it, but this has been rare.
In the $5−10 million revenue range, some shops have been able to keep up with investments in equipment and facilities. Buyers are more likely to acquire a shop as a going concern, but the majority of buyers will still want to consolidate facilities. Some shops in this range have merged, which is one strategy, but it usually requires one shop to close and/or one owner to retire. Often, the amount that buyers are willing to pay does not give the owner much of a return on their investments. However, if a facility is well-maintained and profitable, and the business is prepared for a sale, this improves their chances to attract acceptable deals.
For shops in the $10−25 million, it is much more likely that a buyer will keep the facility in place, and valuations, terms, and the overall marketability of the shop are typically better than in the sub-$10 million market. Shops in this range can consider making consolidation-type acquisitions of smaller shops.
The $0−5 million shop market, with 113 companies, represents somewhere around $150−200 million worth of revenues in total. Consolidating these companies is a significant opportunity for buyers who are willing to invest the time, effort, and money into making acquisitions. Another alternative for growth for companies in this range is to start or acquire an offshore group.
At the $25+ million revenue level, it is more likely that a private equity, public, or overseas buyer will be interested. Valuations, terms, and marketability are generally another level up from companies with lower revenues. Acquisitions of smaller companies is certainly a strategy for growth, and it is easier for these shops to obtain financing for deals. One example is Advanced Circuits, which is backed by private equity firm Compass Diversified, and has made five acquisitions since 2008.
Although I continue to be amazed at small shops' ability to survive, I predict that in 10 years the number of PCB companies will decrease on average by 10 or more per year, and the North American market will be down to 75−100 PCB manufacturers. The average revenue per shop should increase, as the majority of shops that are acquired or that close will be in the sub-$10 million revenue space. The decline could be accelerated if we experience a major recession, or if there is some other shock to the market. Although the number of manufacturers will go down, the companies that survive will be much healthier and innovative, and in the end, we will have a stronger PCB industry in North America.
Tom Kastner is the President of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital LLC, Tampa, Florida, member FINRA and SIPC. To read past columns or to contact Kastner, click here.