An M&A Perspective on the Current Market


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Matties: And they’re going to lower the offer.

Kastner: It would change the offer, but most likely, that would lower it too.

Johnson: Given the greater likelihood that your team will jump ship if you drop this on them suddenly, it would seem that the advice for ownership considering this is to be open and transparent, at least with the senior management.

Kastner: Absolutely. Now, I’ve known 85-year-old owners who were tremendously worried that their employees would find out that the business was for sale. Then, once they talked to the employees, they’re like, “Thank god. We thought you were going to die at your desk.” Some owners are very worried about it, but the employees see what’s going on in the industry. They see other companies being acquired and sold, both good situations and bad situations. They know that, at some point, the owner is going to do something. If you’re open with the team, then it could put in a little bit of uncertainty, but it eliminates a lot of guessing and rumors and so on.

In general, I would say to be open with the team. You can always provide some sort of incentive at least for the team, if not everybody in the company, as far as a bonus or some sort of compensation for helping with the process. Most companies should have some sort of bonus incentive anyway. This can be in addition to whatever incentive programs you already have. Every company and owner’s style is different. It has to be customized to the way they’ve been running the business.

Matties: What multiples do you see? Is there a trend up or down, or what should a seller expect?

Kastner: It depends. But I would say multiples do tend to be lower for smaller companies. That’s common knowledge. If something is going to be kept in place, generally, on the lower end, it’s a four to five multiple on EBITDA or adjusted EBITDA. You can get higher to six, seven, eight, or more. But those are larger businesses that are very well-run and profitable, have invested in people and equipment, and have a lot of growth opportunities.

Matties: What profit margins are typical these days in a PCB facility?

Kastner: Of course, there are some that are losing money and/or break even. A well-run PCB shop has EBITDA margins of 10–20%. There are very few public companies in the space. There’s TTM, FTG, and Advanced Circuits; as part of Compass Diversified, they publish their numbers. Otherwise, everybody is private. Generally, if somebody is in that 10–20% range, I consider that to be a well-run facility, which accounts for only 20% of the shops.

Matties: That’s not very much in terms of the percentage of shops. When you say well-run, are you looking at companies that are automated and digital factories? How would you define that?

Kastner: On the operational side, I would define it as being efficient. On the technology side, they have something that customers will pay more for. There’s less competition, or they have a technology edge.

Matties: The common sense things that you would expect leading in technology and keeping waste out of your processes.

Kastner: Yes. It takes investment in equipment and then investment in technology development to get to that point.

Matties: That’s where the emotional manufacturing mind comes in because these are choices you have to make. You have to choose to do these things; they don’t just happen.

Kastner: As an owner, you’re either reducing your compensation or taking on more debt. That’s a choice. You can choose to turn your PCB shop into a dairy farm and milk it into the sunset, or you can invest and look to grow the shop. For many shops, the ROI for equipment and technology is not very clear because it’s been tough to even survive. But for most of the top 25 shops, you can tell there’s been a tremendous amount of investment, and it’s paying off for them. Advanced Circuits just put in a new facility in Arizona, and TTM announced that they invested $15 million in Wisconsin. We already talked about GreenSource Fabrication, too. On the PCB assembly side, there’s been a ton of investment. Companies are investing, but it’s a choice.

Johnson: In a recent column, you described the quality of earnings report. Part of that discussion was of it being a tool to prepare for sale as well as to analyze and figure out how to optimize your sales and revenue stream to feed the factory. You have to pay attention to that part of the business, too—whether you’re going to sell or not.

Kastner: Absolutely. The folks doing the quality of earnings reports see hundreds of companies, if not thousands. You can benefit from their breadth of knowledge looking over different manufacturing sectors and services to see how your business compares not only to your industry but to a wide range of other companies. That can be very eye-opening. A lot of owners think, “Because I invested $10 million, my baby must be worth $15 million.” Then, they hear from me that maybe they’re worth $2–3 million. They think, “Kastner is an idiot.” Then, they get an evaluation or a quality of earnings report and think, “Kastner’s evaluation was too high or low.” It gives you another perspective on both how people would value the business and what they’re looking at.

Matties: It seems to me that there’s a great opportunity in this time and space that we’re in with the supply chain, the amount of money that’s going to be flowing into the economy, and the low interest rates. If you were ever to make a choice of either improving and fixing your business, finding the right markets, bringing in efficiencies, lowering the waste, tuning the process, and becoming digital, now is a great time to do it.

Kastner: Whenever there’s disruption, there are a lot of opportunities. Who knows where exactly the market will go and how quickly the economy will recover, but again, there are a lot of opportunities if you’re open to them. North American board shops and EMS markets have been pretty beat up over the years and may not think of it as an opportunity, but if you look at the top companies in those industries, they’ve shown some pretty good growth. The whole cliché of the owner has to be busy working on the business, not in the business, applies today more so than ever.

Johnson: A big takeaway from this conversation so far is that management needs to embrace change one way or the other. Like the rock and roll lyrics from the ‘70s, “If you choose not to decide, you still have made a choice.” Can a team be too embracing of change in these times?

Kastner: Yes. You don’t want to throw the baby out with the bath water, and you don’t want to get too far away from your core competitive advantages. There are examples of companies that went too far, such as AOL Time Warner or New Coke when they threw out the real thing.

For large companies, you can swing for the fences, and you’re not going to kill the company. For smaller companies, you have to decide whether you’re biting off more than you can chew. I’ve seen a few examples so far this year make moves where you think, “Does that make sense given what might be on the horizon and with the coronavirus cloud over us?” You can over-invest and get overextended. You have to be careful, but the worst thing would be sitting around and doing nothing. You must do something, but each company has to decide whether you’re doing enough or you’re doing too much.

Matties: It’s up to the strategy. You start with a smart strategy and go from there. If you’re at a point where your strategy is unclear, you have to go seek advice.

Kastner: I’m a big fan of peer groups. I know a lot of owners don’t think they have time, and they don’t want to open up in front of strangers. They’re like, “Why am I in a group with an insurance broker, a CPA, and a coffee shop owner? What do their worlds have to do with mine?” But peer groups can be helpful as far as talking about your issues and hearing how other people respond to their issues. For example, if you’re currently running using QuickBooks, and you try to go to SAP or Oracle, that may be a ridiculous example, but you see people doing that kind of leap in other aspects of their business, and think, “That’s pretty risky to go that far.”

In the M&A world, acquiring a business can be risky. You have to be very careful about the type of business you’re buying, how much you’re paying, and how much you’re borrowing to buy the business. Is it going to stretch out the owner or the core of the team too much? Will customers stay? In general, acquisitions are a great way to grow, but you have to do it carefully.

Matties: What is your favorite business book?

Kastner: The flippant answer is M&A for Dummies. That’s the book that I recommend the most. I have it, I’ve read it, and I review it every year or so. It’s very well laid out. It’s written by a competitor, but he’s a good guy. I also like anything by Jack Welch.

Matties: When you look at what Jack Welch did with GE, that was amazing. He just passed away in March of this year.

Kastner: Right. He’s one of my favorite business book authors. Some of his key principles are to be in the top three of anything you do, and to hold people accountable. There’s so much wisdom in those books.

Johnson: Thanks for taking the time and sharing your insight.

Kastner: You bet. Thanks, and I hope everybody stays well.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.

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