Today’s M&A: Right on Target

Feature Interview by Nolan Johnson
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In this enlightening conversation with M&A specialist Tom Kastner, Nolan Johnson learns that it’s a buyer’s market—and a seller’s market too. This sets up an interesting dynamic no matter which side you might be on. What trends are in play that have led to this situation and how can you make the most of it? Tom shares valuable insights that will get you thinking and planning your own strategies.

Nolan Johnson: Tom, if PCB fabs are actively planning to expand their business in response to the current market, and if they’re looking for investment money, where is that money? Is this a good time to invest, and why?

Tom Kastner: I’m very bullish on the PC board industry and the EMS industry, but then I’m very bullish on the entire U.S. electronics industry. Coincidentally, I think it’s both a good time to sell and a good time to buy.

Johnson: Why is it both a good time to sell and a good time to buy?

Kastner: Recently, we represented a fabricator and an EMS company in their sale to a strategic buyer in the industry. For sellers, especially for companies that are doing well, it’s a good market. For companies that are not doing so well, whether they’re smaller or just not as profitable, there’s still a lot of liquidity for all types of companies. Whether they’re growing and very profitable, or maybe not growing so much and not so profitable, there’s still a lot of liquidity for both.

Now, why is it a good time to invest in the industry? I think it’s because we’re talking about advocacy: a quick increase in expectancy requests in the U.S. supply chain; increased awareness of what should be made in the U.S., according to ITAR rules, or for supply chain security purposes. Those are all great tailwinds for the industry. I certainly do not think that all the business is coming back to the U.S. That’s just not going to happen. But if a small portion of the overall market comes back, that’s a huge benefit to the industry.

Johnson: What’s your opinion on how the PCB industry in North America should be retooling to maximize this opportunity?

Kastner: The larger companies like Summit, TTM, and so on have the capital to invest in themselves and the companies that they acquire. A lot of the companies that are smaller just really have not invested. Many have, but many have not.

There’s a huge investment deficit. Many of those smaller companies that have not invested are very good acquisition targets, and some buyers are looking for that type of target. The companies that have kept up with investments are great acquisition targets for Summit and others that are looking to acquire larger PC board shops.

Johnson: Some of the larger shops—Summit, TTM—come to mind, of course. It seems like there’s some private equity activity as well.

Kastner: Yes, there is quite a bit of private equity interest in the sector. In general, the private equity firms are interested because they have an interest in re-shoring and investing in the U.S., and the trickle-down business that will come with the emphasis on investment in semiconductors and the supply chain in the U.S. The private equity guys are pretty smart cookies. They know what they’re doing. TTM is a bit of a mixed picture, but certainly FTG has done a couple of acquisitions and Summit has done several. Fralock is an assembly company that acquired both Lenthor and Career. Fralock is private equity-backed, and really, the private equity-backed companies have been doing more acquisitions in the space than the public companies.

There’s a lot happening in the EMS sector as well. But I think they’re mostly going after that trend to re-shore and shore up the semiconductor supply chain.

Johnson: So far, we’ve talked about buying and selling. What about just raising capital? We were mentioning that the smaller mom and pop shops may not have been keeping up on the investment end; they may not necessarily have had the capital or the cash flow to grow their business, keep it on the leading edge, and make that sort of investment. Is there a strategy for them or is that a good investment for someone else?

Kastner: You really don’t see much venture capital or early-stage capital in PC boards or in PC board-related technology. Interest rates have recently increased, but even now, interest rates are relatively low. There’s still a lot of credit, so it’s pretty easy to get financing for either new or used equipment. But a lot of the smaller shops are asking, “Okay, where do we start?” Many of them start with direct imaging, which is probably the right place. Next, it’s test equipment, new drilling machines, or a new wet processing line. But where you see them jump forward is when they get into direct imaging and new high-speed drills. I’m guessing it’s because they put it off for 10 years, and finally got to the modern age. There’s plenty of money for equipment financing or to improve facilities, but frankly, a lot of owners have been milking the cash cow.

For the milkers, I don’t know how much longer they can survive. I visit some shops, and I’m just amazed that they can stay in business. I don’t mean to put them down. I very much admire them for being able to survive and do what they do, but I’m not sure how much longer they can do it that way. It makes it hard for them to grow the business. There’s either bank financing, or private equity financing is available.

Johnson: How much influence has the recent U.S. government legislation—the CHIPS act, the PCB Act of 2022—had on the current M&A environment? Is government involvement helping to change the investment perspective?

Kastner: Yes, particularly among the private equity world and other investors, and for banks as well. Every little bit helps. Every private equity deal that’s done, every acquisition that’s announced, is just further evidence that this is a good sector to be involved in.

There are also the other market dynamics that are helping. There’s the trend to move away from manufacturing in China for IP security reasons. There have always been logistics and communications reasons, and now add IP security to that list. I’m hearing more and more that the end customer would like to move production to North America, because they’re concerned about IP security for medical equipment, communications, or other things where there’s a fairly high margin.

Johnson: You just ran through some key areas where a fab might invest to upgrade their manufacturing floor. But simultaneously the U.S. electronics industry is increasingly protecting the IP. We have the emergence of the CMMC (Cybersecurity Maturity Model Certification), for example, creating a certification process that runs through the supply chain. There will be companies which, I suspect, receive notice that they need to go through CMMC compliance because something that they build is specified for a system that requires it. Going forward, it looks to become a key part of the industry just to do business and, in many ways, a place to invest as well, regarding cybersecurity, data management, and basic hygiene.

Kastner: Everyone will need to pay attention to that bill sooner or later. Companies typically do not announce that they were hit by ransomware, but I know it has affected everybody. But in tandem with protection against ransomware or other cybersecurity issues, you must ensure you’re compliant. Those concerns are only going to increase as the compliance requirements come online, but it’s also good business practices. If you haven’t been hit yet, you’re just lucky.

Johnson: Right. Elsewhere in our recent coverage, Divyash Patel refers to it as “basic hygiene.” You think of it like brushing your teeth and combing your hair. It just needs to be done.

Kastner: If you don’t have ISO or UL, it’s pretty tough to be in business anymore. It will be the same with cybersecurity: you must maintain a certain level. Again, it’s tougher for the smaller mom and pop shops to keep up with that. It’s just another headache. Whereas the larger shops could spread that investment over a wider base and it’s easier for them to do. I think it’s another thing that will lead to more consolidation in the industry.

Johnson: It seems like the trend is further consolidation into fewer, larger, more capable companies. Tom, does that still leave a place in the market for a boutique company?

Kastner: Absolutely. One thing you don’t see too much of are greenfield investments, but I think it would be a fair number of niche companies that are really good at one or two smaller markets. Typically, those niche markets are very profitable, so those companies can invest in equipment and other things, like cybersecurity.

Johnson: Is this a good time for an OEM to consider a captive shop? There are pros and cons to that approach. Certainly, keeping your IP all on your own campus is one advantage. Is now a time to follow the lead of Whelen Engineering or Schweitzer Engineering Laboratories in Idaho?

Kastner: Yes. There’s Schweitzer and some other small ones, right? It would be interesting to consider doing that. The problem is, of course, finding the right people to hire.

Certainly, the talent pool is getting older. It’s definitely an older industry. I wonder, between the permitting, the talent, and the amount of investment that’s required, if the return on investment is strong enough vs. just focusing on your own products. Without knowing the calculations, it’s hard to decide. Obviously, those two companies did their calculations and decided it makes a lot of sense. So, if it makes sense for them, it must make sense for others.

At the same time, just being able to buy from the domestic market has its advantages. Everybody in the U.S. is having trouble finding any talent, from sweeping the floors all the way up to the CEO suite. These companies must decide whether they want to invest their time and money in finding talent for part of those supply chains, or if it’s better invested in another part of the business. Johnson: I think that’s something that is emerging in our conversations for this issue. There’s money to invest. Investment is necessary to move forward, but it includes equipment, talent, and security. You’ll have to respond pretty much to all three, but in your own order.

Kastner: That’s right.

Johnson: Tom, thanks so much for this conversation; it sheds much light.

Kastner: You’re welcome. I enjoyed the conversation.

Tom Kastner is the president of GP Ventures Ltd (www.gpventures.com), an Investment Banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.