Given the softer economic environment and accompanying feelings of uncertainty plaguing distribution firms and their employees, we would like to share key thoughts and observations about trends possibly impacting distributors over the coming months and years ahead. We will also provide some food for thought and ideas on how to manage through the downturn.
Based on recent conversations with distribution executives, current investment banking engagements with distribution businesses and discussions with private equity firms active in distribution space, the following observations provide a pulse of market conditions:
- On the whole, distributors are feeling
the effect of a recessionary environment. While certain sectors within the
distribution industry have weathered this environment quite well (MRO and
Industrial for example), even the best performers appear pessimistic about the
coming 12 to 24 months.
- Headcount reductions and branch rationalizations
are active and will continue for the foreseeable future. This is a very painful
process for most involved, but one that has become necessary for many
- M&A activity and related valuations have
softened across the broader distribution industry. While certain sectors remain
active with stable pricing, the number and valuations of transactions seen in
2006 and early 2007 have declined meaningfully and will take some time to
- The capital available to both acquire and grow businesses has become very selective. For the best companies, capital is still available at less favorable terms than 12 months ago. But for those companies with performance, profitability, management or other issues, capital is largely unavailable at this time.
While the aforementioned may not appear particularly positive, they do create certain opportunities for those distributors focused on long-term growth and value creation. The following are thoughts on how to successfully manage through the current economic downturn:
- Down markets present great
opportunities to take market share. For distribution businesses that have the
courage to invest in a down market, now is a good time to acquire market share
from wounded competitors.
- There is a compelling opportunity for strategic
buyers to consider acquisitions.
- Competition and pricing for transactions has
decreased (both from strategic and financial buyers), and buyers who have cash
available to close a transaction, versus relying on outside funding, have a
- The tough markets provide leading distributors with an opportunity to shine while weaker operators are being exposed. This is important in attracting both customers and talented employees.
In summary, the market headwinds will continue to hinder distributors in the months ahead. But there are a host of compelling opportunities to create value for those who successfully tack through these winds and outpace competitors.
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