Merger Mania Returns with a Vengeance
Since July 1997, the cabinet industry has undergone a series of acquisitions that have altered the ranks of the top companies. The latest round of blockbuster buyouts has altered the makeup of the cabinet industry.
BY LARRY ADAMS
The highly fragmented cabinet industry solidified somewhat over the last year and a half as three of the country's largest cabinet companies were bought out by companies looking to increase market share. A fourth company was purchased by a private-equity investment firm that was looking to enter the booming cabinet market.
The headline-making acquisitions included:
Each of these recent sales offered a different benefit to the buyer. For example, Schrock's cabinet line of upscale, but not quite semi-custom cabinets, fits between Aristokraft stock and semi-custom cabinet lines, according to Gary Lautzenhiser, executive vice president of sales, marketing and business development for Aristokraft. Schrock also has some presence in home centers, a critical consideration because home centers have become a pivotal channel for cabinet sales. "When we looked at those two things, it was a nice fit for our business," said Lautzenhiser.
For Masco, the Texwood buyout was not just about filling a niche in its product offering. In fact, Texwood is very strong in the upper-end of the cabinet segment, a price point already occupied by other Masco cabinet divisions. What Texwood does bring to the table is a good distribution and customer base, and perhaps most importantly, its cabinet door and component operations. "This is a very competitive business and you are never done trying to improve," said Samuel Cypert, vice president of investor relations for Masco.
The acquisitions come at a generally prosperous time for the industry. The cabinet industry has experienced almost 12 percent growth in year-to-date sales, according to the Reston, VA-based Kitchen Cabinet Manufacturers Assn. Masco and Aristokraft each posted strong cabinet sales in their most recent quarterly reports. In fact, Masco projected that 1998 cabinet sales will break all sales records. Triangle Pacific's cabinet sales were down by 15.2 percent in the first quarter, ending in April, but, buoyed by strong flooring sales, the company's sales as a whole were up more than 19 percent.
"The consolidations are a sign of industry maturation," said Richard Titus, executive vice president of the KCMA. Titus' comments echoed statements he made 10 years ago during a similar round of big-name acquisitions.
In for the Long Haul
"The things we liked about the cabinet industry are its size, the fragmented nature of the industry and the type of industry it is," said Thomas Bagley, senior managing director of Pfingsten. "We tend to like low- to medium-tech manufacturing businesses that have growth potential both internally and through acquisitions."
A second investment firm, H.I.G. Capital, also recently invested in the cabinet industry. The equity firm has invested in Republic Ind. of Marshall, TX, although Republic's president, Gene Ponder, remains the largest shareholder in the company. Republic has experienced ownership by an investment firm before. North American Products, a precursor to Republic Ind., was sold to an investment group in 1984. Four years later the company filed for bankruptcy. Ponder, the original owner, bought the company back and reorganized under its current name.
"I believe the partnership with H.I.G. Capital will provide tremendous financial and operating resources which will enable us to improve service to our customers through continued investment in capital equipment, broader product offerings and greater geographic reach," Ponder said.
The failed North American Products' experience, along with others such as Whirlpool Corp.'s cabinet-venture miscue in the 1980s, has caused some industry insiders to wonder about the long-term commitment by these companies. "Frankly, outside investors are entrepreneurs looking at where they can generate the kinds of results that they are interested in," one industry insider said. "They are not necessarily in it for the long term."
"Everybody has their own opinions of what equity firms do," said Bagley. "We tend to hold on to our companies longer than most. Our focus is on growing the business. At some point, we will generate liquidity for our investors. This could mean selling the business, recapitalizing the business or taking the business public. But we are not focused on an exit at this point."
Companies owned by investment firms are not the only ones that are drawing speculation about the future.
Ever since Triangle Pacific was purchased, there has been talk that Armstrong would ditch the Bruce and IXL cabinet divisions. Bruce and IXL cabinets are the only cabinet producers in Armstrong's portfolio and would represent less than 9 percent of Armstrong's overall sales. Armstrong's finances were also put into a "bit of a strain" because of its acquisition of Triangle Pacific at about the same time as it acquired DLW, a leading European flooring manufacturer, according to Cynthia Werneth, a bond rate analyst who tracks Armstrong for Standard & Poor's stock index. Also, Armstrong is facing a number of asbestos-related legal actions, but Werneth said the company has set-aside enough money to pay the anticipated legal costs.
"While Armstrong has said it intends to keep the cabinet division, (selling it off) could be one thing they are thinking about," Werneth said. "They do not have any other cabinet business, and certainly the profit margins are not as high as in flooring. I could see scenarios where Armstrong might entertain offers for it."
Floyd Sherman, chairman and CEO of Triangle Pacific, refuted the speculation. "Armstrong intends to let us continue to develop the cabinet industry," he said. "In the near term, I think we can grow the business to about $500 million (the size of its flooring division) and, in my view of our cabinet business, we can eventually grow it to the size of the flooring division."
That is an aggressive goal considering Triangle Pacific's struggles in the cabinet market. Throughout the late '80s and early '90s, the cabinet divisions were often overlooked in favor of the flooring divisions. Working with a "really, really terrible balance sheet," according to Sherman, the company would often have to cut back cabinet operations and put those resources into its flooring division. "Cabinets were continually constrained in its growth," Sherman said. "This merger gave us a new lease on life."
More Acquisitions Possible
Driven by increased competition and a more discerning consumer, some companies may look to acquisitions to increase market share, add new products or price points, and establish new distribution networks.
"Given the fragmented nature of the industry, acquisitions give significant opportunity for a company like Masco to be a major consolidator in the U.S. cabinet industry," said Wes Chinn, a bond ratings analyst for S&P.
While companies could start up divisions to design and manufacture products, or do them in-house in existing facilities, it is often cheaper to buy a company that has established facilities and products "because of the expenses and other costs associated with a start-up project," Cypert said.
No matter how much consolidation, "there will always be a place for smaller entities," said Titus. "There is still going to be that small entrepreneur doing a good job in a local area."
If that is the scenario -- large companies expanding and smaller companies filling market niches -- then mid-sized companies are bound to feel the squeeze. Companies that once were strong in their local or regional market now face competition from national cabinet companies that can sell to most price points and often have established distribution networks that ensure a prominent place on home center and kitchen and bath dealers' shelves. Many in the industry see the face of the cabinet business undergoing a permanent change, with mid-sized companies struggling to find a place.
"The efficient manufacturer that offers quality and service and the ability to directly access the consumer is going to be the survivor in this business," said Sherman. "The industry has allowed too many marginal players that have existed for a long period of time."
Larger companies also have deeper pockets which gives them an advantage because they can invest in new technologies to increase production capacity and efficiency or to meet governmental regulations. At least one cabinet company, Hoffman-Atchley's, shuttered its doors in 1989 in the face of Southern California's strict air quality regulations. The company reportedly closed because it felt it could not meet the regulations and still make money.
Large companies also have the edge when competing for raw material. For instance, several years ago the demand for particleboard outstripped supply and panel suppliers were forced to allocate the scarce product. When push came to shove, and panel companies had to determine whom to ship to, the best customers, i.e. the biggest, were usually served first.
"Generally speaking, to be very big is good and to be very small is good, but to be stuck in the middle is not so good," Bagley said.
A Decade of Buyouts
More than a decade ago, the industry experienced the start of a series of acquisitions that gave rise to Masco and others, while sounding the death knell for at least one cabinet company. Only a handful of the 25 largest cabinet companies operating in 1988 remain untouched a decade later. Of the 10 largest cabinet companies in the industry this year, seven of them have either been acquired themselves or have bought out another company. Two other top 10 companies were not even in existence 10 years ago.
Today's industry leader, Masco, was the leader in acquisitions in the mid-80s. Prior to 1985, the plumbing products company did not have a presence in the cabinet industry. Within a year, Masco had acquired its way to the top of the industry. Its first prize was Merillat, then the biggest-selling cabinet company in the United States. During the next 12 years, Masco purchased a number of high-profile companies including KraftMaid, StarMark, Fieldstone and Texwood. Masco's market share nearly doubled in that time frame. By 1997, Masco's cabinet sales had topped $1 billion, making it the sole member of the cabinet industry's billion dollar club. Its sales that year were greater than the combined sales of the cabinet industry's 11th through the 25th largest companies featured in Wood & Wood Products' April 1998 Top 25 survey.
"Our strategy is to acquire companies that are leaders in their market niches," said Cypert. "We keep the management in place and give them support to grow the business."
Chinn concurred: "Acquisitions are a key part of Masco's growth strategy."
Not all acquisitions resulted in success. One of the industry's biggest failures was Whirlpool's 1986 purchase of Mastercraft and St. Charles. By 1988, Whirlpool was looking for another buyer. The appliance giant tried to sell its cabinets in the same manner as it sold appliances and it just did not work. Management reportedly alienated dealers and distributors, and the companies suffered. The cabinet division was sold in 1989 and renamed St. Charles Cos. In 1996, St. Charles sold Mastercraft to Elkay, another conglomerate that bought its way into the cabinet industry.
Consolidations Can Mean an Uncertain Time for Workers
Scott said Fortune Brands' acquisition of Schrock could help pave the way to a new effort to unionize workers because Schrock's new sister company, Aristokraft, has union workers at its Jasper, IN, plant. Scott said previous efforts to organize labor at Schrock were thwarted by Schrock's former owner, the Swedish conglomerate AB Electrolux.
"Companies that succeed work hard to make employees an integral part of the manufacturing process," Scott said. "The best companies allow the workers to use their brains as well as their hands."
Good for Consumers
"Although the merger acquisition activity among cabinet companies does not directly affect member dealers, the consumer, as the end user, actually benefits the most," according to a statement from the National Kitchen & Bath Assn. "They receive better, more sophisticated products at more competitive prices. When companies merge, each brings with them their own expertise and knowledge regarding building better products for consumers. Put together, these ideas ultimately design more sophisticated cabinets."
"Homeowners do benefit," said Thomas Newton, president of CertainTeed Home Institute, a Pennsylvania-based information center dedicated to educating consumers, "If you go back 20 to 30 years, companies that consolidated did not get the end results they wanted -- higher-quality, lower prices, streamlined efficiencies. That has changed. Bigger companies today are better able to eliminate redundancies and streamline operations. With manufacturing and shipping efficiencies, just-in-time deliveries and more options, homeowners have benefitted over the years."
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