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Hold ‘em’ or fold ‘em’?

May 31, 2017 | 08:00 PM |

An in-depth study of 22 representative, publically traded North American steel companies quantifies the real-world ramifications of failing to make M&A a core strategy. The results? A ‘systematic’ approach to M&A is the next best thing to an ace in the hole.

Key leaders in the North American steel industry have rarely been more upbeat. An overwhelming 96 percent of sector leaders are either optimistic or strongly optimistic that the financial performance of their companies will be better over the next three years than over the past three years, according to a recent survey of North American steel industry executives at the chairman, chief executive, and chief financial officer levels conducted by Greenwich, Conn.-based Headwall Partners, an independent corporate finance and strategic advisory firm. The survey was conducted the first quarter of 2017.

More than 90 percent of survey respondents believe that the policies of the Trump Administration will lead to improved U.S. GDP with 87 percent of respondents believing these policies will have a positive impact on steel volumes. Increased infrastructure spending, lower corporate taxes, and more favorable trade agreements were expected to have the greatest positive impact on multi-year growth at the respondents’ companies.

In this environment, many players in the North American steel sector are looking ahead to increased merger and acquisition (M&A) activity. Survey results show 96 percent of respondents expect their company to be more active or about the same in the M&A arena over the next three years. Over that same period, 58 percent of those surveyed expect to make at least one acquisition, 32 percent anticipate making multiple acquisitions, and 21 percent plan to sell a facility or business unit.

Despite the message implied in these results, the survey highlights a glaring gap at many sector companies. Namely, most sector leaders have not made M&A a key element of their corporate strategy. Only 13 percent of respondents said their company made M&A “a core strategic priority” and nearly 40 percent said they pursue M&A “only opportunistically, when businesses are for sale.”

When sector companies make only a soft commitment to M&A, the quasi-commitment can have significant negative consequences, according to a separate M&A study performed by Headwall Partners. Headwall’s M&A study, clearly shows that a growth strategy focused on M&A is a key differentiator for sector participants over the long-term, with those companies that focus on growth through M&A dramatically outperforming their industry peers, on average, in all key financial metrics and, in particular, in shareholder returns.

Companies most cautious about M&A saw negative shareholder returns over the past 10 years, with a median 50-percent decline in equity value over the period. Conversely, those employing the most systematic approach to M&A saw a nearly 100-percent positive median shareholder return over the same period.

Given this compelling evidence for value creation through M&A, Headwall believes management teams should re-evaluate their growth strategies to make M&A a priority, or risk falling further behind.
A zero-sum game

To understand why making M&A a core strategic priority is critical, it is important to look at conditions in the marketplace. The North American steel industry faces one challenge after another—competition from imports, declining volumes, stagnant pricing, pervasive cyclicality, and global overcapacity. The list goes on and on. 

As a result, the sector has experienced virtually no organic growth over the past 10 years. U.S. apparent steel consumption has declined 23 percent (from 135 million tons in 2006 to 104 million tons last year) and pricing has been flat.

It should come as no surprise then that stock market returns for the North American steel sector have been flat, with an index of 22 representative publicly traded North American steel companies generating only a 10-percent cumulative gain over the last decade. By comparison,  the S&P 500 has risen by 108 percent over this same period.

With no organic growth, the North American steel sector shares the attributes of a zero-sum game. A zero-sum game is economist speak for a competition in which one participant’s gain is equivalent to another’s loss. One of the most frequently cited, popular examples of a zero-sum game is poker.

In poker, each player places their bets into the pot with the pot ultimately going to the player with the winning hand. As such, the money wagered is simply redistributed among the players. Wealth is neither created nor destroyed.

Similarly, in the no-growth North American steel sector, sales gains by one company must come at the expense of another because there is no new volume for which the companies can compete.

While no wealth is created in poker, poker games do have winners and losers. The players with greater skill are more likely to be the winners over a large number of hands. Competition in the North American steel sector is much the same.

While financial metrics for the sector—including revenue, EBITDA and stock market returns—have been stagnant to down as a whole, the variability in these metrics among individual steel companies is very broad.

By way of example, $100 invested 10 years ago in an index of the 22 North American steel companies in our sample would be worth $110 today. That same $100 invested in each individual company would be worth $325 on the high-end and only $23 on the low-end.

This variability among individual steel companies is staggering and begs an obvious question: What are the long-term strategies employed by the “winners” and can other sector companies successfully adopt the same winning strategies?

In Headwall’s view, M&A is a key strategic differentiator and over the long-term, companies with a strategy focused on growth through M&A can meaningfully outperform their industry peers.

M&A and value creation

Individual M&A transactions are typically evaluated by comparing stock prices before and after a deal is announced. This approach assesses if investors expect a transaction to add value over the long-term.

While such studies have merit, they don’t gauge the impact of multi-year, multi-deal M&A strategies. Headwall Partners has taken a deeper dive by evaluating different M&A strategies over a 10-year period to determine if certain strategies are superior to others.

From 2006 to 2016, the 22 public North American steel sector companies in our group completed 221 total M&A transactions. To assess the efficacy of the different M&A strategies employed by these companies, we categorized each into one of four different acquisition styles based on transaction frequency and size:

 Cautious: Companies that infrequently pursue M&A, and when they do, make smaller deals.

 Bolt-on: Companies that pursue frequent acquisitions of smaller targets.

Transformative: Companies that pursue M&A infrequently, but when they do, they consummate large transactions relative to their own size.

Systematic: Companies that are frequently in the M&A market pursuing both large and small acquisitions.

Headwall defines more frequent acquirers as those companies that completed 10 or more acquisitions over the 10-year period, and larger acquirers as those companies for which the largest transaction was greater than 20 percent of its own market capitalization at the time of the deal.

Upon applying these definitions, the sector has four Systematic acquirers, six Bolt-on acquirers, six Transformative acquirers, and six Cautious acquirers.

Driving Value Creation

An analysis of equity returns and growth in financial metrics for these alternative M&A strategies yields several conclusions.

Systematic acquirers have markedly stronger median revenue and EBITDA growth compared to other acquirer styles and, in particular, versus Cautious acquirers. This makes sense, of course, because consummating acquisitions adds the revenue and EBITDA of the target company to that of the acquirer, thus accelerating the acquirer’s growth.

The conclusions get more interesting when looking at the median change in margins. Systematic acquirers have been materially more successful at maintaining their margins over time versus the other styles, while Cautious acquirers have seen a dramatic drop in their median margin performance.

Specifically, in 2016, Systematic acquirers had a median EBITDA margin of 71 percent of their near-peak 2006 level, while the same metric for the Cautious group is a dramatically lower 22 percent versus 2006. With the benefit of acquisition synergies, Systematic acquirers have been able to grow their revenues and help margins.

In Headwall’s view, the most important of the series of metrics we reviewed is long-term value creation because value creation is the primary objective of every management team. The 22 companies in our study have been public for the entire 10-year review period, which allows value creation to be assessed by reviewing 10 years of stock price performance.

By this scorecard, the variability of equity returns by acquirer type is staggering: Systematic acquirers have turned a $100 investment in their stocks in 2006 into a median value of $199 today, while the Cautious acquirers have destroyed shareholder value over the same period, turning a $100 investment in their stocks into a median value of just $50 today.

The analysis clearly shows that a company’s M&A strategy can help drive financial performance and stock market returns. Over the long-term, those companies employing more focused M&A strategies have meaningfully outperformed their less focused peers on all of the key financial metrics reviewed.

Buyer or seller – Which are you?

To be successful with a Systematic approach to M&A, management teams must be able to answer the following three questions in the affirmative:

   1. Does your balance sheet have the capacity to make acquisitions?
   2. Are there viable acquisition targets for you to pursue?
   3. Do you have the manpower to integrate the acquired businesses?
If corporate leaders cannot answer these questions affirmatively, they should ask themselves two more questions: “Is our company the “mark” at the poker table?” and, if so, “Would our equity owners be better off if the company was sold before a decline in value preordained by the zero-sum nature of the North American steel sector?” Kenny Rogers offered good advice when he sang, “You’ve got to know when to hold ‘em, know when to fold ‘em.”


With the myriad of challenges facing the North American steel sector, it may feel as though participants have been dealt weak cards. The skill with which each company plays its hand, however, is the key determinant of its ability to create long-term value for its equity owners.

Our analysis of financial performance and value creation makes it clear that a Systematic approach to M&A can lead to significant outperformance in many key financial metrics and shareholder value creation. While the Systematic approach to M&A doesn’t guarantee success, it is an ace up the sleeve that can swing the likelihood of success in a company’s favor.

Peter J. Scott is the founder and a managing partner of Headwall Partners LLC, a corporate finance and strategic advisory firm focused on the steel and metals industries.

In his 25-year career in investment banking, Scott has completed more than 150 transactions with a total aggregate value of more than $90 billion.

A special thank you to Matthew Gilbert, who completed the financial return calculations supporting this article.

For a full copy of Headwall Partner’s M&A analysis, go to or


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