Missouri manufacturers, especially those with durables production should be sensitive to outside economic influences in the next 12 to 18 months. Owners should anticipate tweaking against a downturn, doubling down with a timely acquisition, or even divesting a business that can’t grow through another downturn.
Attrition in Missouri from the Last Time
Manufacturers’ News Inc. reports every year on the population of manufacturing entities in each state. It reported Missouri had 9,270 manufacturers in 2007. Between July 2008 and July 2009, 467 were lost. The number of manufacturers then were 8,650. That number again declined by August 2011 to 8,359, but the number of industrial workers in the state had begun to increase. Manufacturers numbered 7,559 in August 2015, but by now the employment number began to decline after several consistent years of worker increase. Keep in mind these numbers don’t break out those companies relocating out of state or merging.
Post-election Cycle Downturn
The Wall Street Journal reported that the current post-recession economic cycle is the fourth longest in the last 70 years. Unfortunately, GDP data from the US Commerce Department released in late July shows that the annual growth rate has been only 2.1 percent.
Economists are not known to agree but one thing they tend to be consistent about is the impact on the economy of a post-election period when we chose a new president. Dr. Marshall Nickles of Pepperdine University makes a compelling case in his study, Presidential Elections and Stock Market Cycles. “Three of the 16 bear market lows occurred in year one of the presidential term, 12 in year two, one in year three, and none in year four (election year)” This data predated the end of the last Bush administration which was a catastrophic market bottom at the end of an administration as opposed to the beginning, but the cycle seems to be back on track.
Tweak, Double Down or Move On
Owner’s first thoughts may rush to tweaking inventories and manpower. This is what most owners need to do but only if they are certain they are positioned to ride out the next downturn. You may want to externalize the question. What shape will your competitors be in and how could you benefit if you are in it for the long run.
You may want to size up who to pick off. This is the Double Down strategy where you grow through acquisition at a time where targets have reassessed downwards what they are worth. That is to say, while others or tweaking, you are doing your homework by opening dialogues with potential sellers, and going through that slog of exchanging documents and reviewing financials that are the front part of a deal. By the time soft price targets are being set, the Seller is probably learning to manage his expectations for a declining market.
Moving on is the other choice which entails divesting all or part of your company. This is a serious consideration even for successful businesses if the owner is planning to retire any time in the next four years. According to the National Bureau of Economic Research, a full up and down cycle averages about 58 months. Timing an exit must consider that your personal exit doesn’t correspond with a cyclical rush to the exits by those compelled to liquidate. Again, our experience is that it takes an average nine months to find a buyer, negotiate, and go through due-diligence before a close can happen. Hopefully, no outside economic influences restrain the buyer from finalizing the deal.
Merger and acquisition companies may not name names but they report the deal’s metrics that support them. Their clients include private equity firms, and the observation is that the cash-rich, target starved firms have been pushing price multiples beyond the levels prior to the 2008 financial collapse. This is more prevalent for the +$100 million dollar deals where average multiples have buoyed from 7.6x EBITDA to 9.0x EBITDA. Companies valued from $5 million to $50 million are seen as trading above their long-term averages though not by much after the long claw back from 2008.
What to Do?
The election puts everything into play including the value of manufacturing companies. Consider our opening question, “What would you do today if you knew a predictably timed economic trough was coming.” Furthermore, ask the people most important to your business, including key officers, lenders, and major customers. No one will fault you for a lack of foresight. You don’t have to act on the strategy, you simply need to prepare it for timely action if necessary.
Our clients look to us for insight on timing strategic decisions concerning participants in their industry. They want to know what the horizon looks like for making a timely acquisition or when to consider unloading an underperforming subsidiary or business. Our peers are transactional attorneys, accountancy firms, bankers, and other professionals who see the early movers in economic trends.