Pappalardo: Metals Market’s Ripe for M&A

He highlighted four factors driving M&A:

• Mature industries have limited opportunity for organic growth. Acquisitions offer a means to exceed the market growth rate.
• Buying into a market gives quick access to new customers and helps diversify a company’s business. Acquiring new customers can help “smooth out” supply cycles across a diverse portfolio of end markets.
• Where the competitive landscape consists primarily of small to medium-sized companies, M&A can be a big differentiator, giving early consolidators a first-mover advantage by building scale and establishing barriers to entry. The service center sector is particularly fragmented, Pappalardo noted. The top five service centers hold less than a 10 percent share of the distribution market. “There’s still a lot of consolidation that needs to happen there.”
• The lower federal corporate tax rate is also an incentive to buy. Acquire a company today, get the cash flow tomorrow, benefit from the lower tax rate right away. “The tax code is helping the M&A market, at least for the short term,” Pappalardo said.

Several factors inhibit M&A activity, however. Lingering uncertainty over the Section 232 tariffs, unresolved issues in the NAFTA negotiations, and the potential for further tax law changes tend to give buyers pause. An acquisition target must also offer just the right strategic fit, at the right price.

“There’s lot of volatility in the market right now, which makes it difficult for people to make decisions,” Pappalardo added.