Bumper Year for Foundry Mergers & Acquisitions? … Will It Continue?

Kim Phelan

If it seems like you’ve read a lot of metalcasting M&A headlines this year, you’re not imagining it. According to Steve Dinehart, senior M&A advisor at Generational Equity, 2022 has been a record year––his recent close on the sale of his company’s client, Northern Iron & Machine, to The Lawton Standard Co. is but one example of a hot market. 

As Q4 ’22 kicked off, Dinehart paused between airports to give Modern Casting his take on the marketplace and why he’s optimistic about more healthy levels of buying and selling to come. 

Modern Casting: How would you characterize the M&A landscape in the metalcasting sector at this moment in time? 

Dinehart: It is a record year across the board. I personally have completed more deals this year, by a substantial margin, than I ever have before. And it’s driven by a number of factors. First, we have a risk environment that has been changing significantly with regard to global supply chains––the world’s response to the pandemic revealed the vulnerability of just-in-time inventory management methods. The political risk of globalization has been one major, obvious driver for onshoring and domestic demand.

Another thing that has been politically driven is tariff structures, which came in the beginning of the last administration, domestically here. It certainly has had a major effect in the context of the casting industry. Onshoring is a way to bypass the tariff effect.

MC: Why would onshoring and increased domestic demand for castings affect M&As?

Dinehart: You’ve got some major foundry players that do not have a full menu of foundry products in terms of size and types of castings offered––acquisitions change that. They can talk to the customer and say, ‘Look, I’m a one-stop shop, and I can do this all domestically. You guys don’t need to go overseas for those parts anymore.’  

MC: How do you explain the apparent non-issue of inflation on M&A activity?
Dinehart: Some folks will say, ‘Hey, there’s all this inflation risk out there, and we’re worried about rising interest rates.’ But overall, interest rates are still pretty darn low. From a historical perspective, yeah, they’re a lot higher than they’ve been in the last couple of years. Frankly, if anybody is being adversely affected by 200 or 300 basis points––the 2% or 3% on interest rates––they probably shouldn’t be doing the deal to begin with.

MC: In your experience, is there typically a surge of M&A activity at the onset of economic uncertainty? In other words, is there a correlation between the bumper year of activity and the predictions about a 2023 recession? 
Dinehart: Do I see an increase of M&As as a predictor of economic uncertainty? No, I have never noted that when we do have an economic downturn. Is there a reduction in M&A activity in a downturn? Yes. But that’s almost kind of definitional. 

Even during times of major economic uncertainty like 2008 and the dot-com bust, I was still selling companies. Obviously, in a major economic recession, I do see a slowing of M&A activity, but it continues; it’s not a halting by any means.

If you talk about a recession, that’s a 3% drop in growth, right? That means you’ve got 97% of the economy still out there. There’s plenty of opportunities to go buy and sell companies in a financially successful way. Recession, like everything else, provides opportunities. 

MC: We’re not doing an economic forecast here, but what’s your personal prediction about mergers and acquisitions in metalcasting for 2023? 


Dinehart: Given the current environment—and I’m talking about the Fed increasing interest rates, which has been factored into the market pretty much already—I expect the M&A market for metalcasting to be strong through 2023. Now, there are black swan types of events that can disrupt, involving Russia, Ukraine, and China. But you can’t predict those, and really you have to assume that the trend line will continue going forward. 

The only thing I’ll note, in all fairness, is that I have seen a pullback of smaller, individual investors––small-business owners looking at some industries and saying, ‘I need to know a little better what tomorrow is going to be before I move forward.’ But most of those folks do not play in the metalcasting industry.

MC: So, is it a good time to sell right now?

Dinehart: It is. We’re going through the second half of the Baby Boomer generation retiring. As a result, you do have a lot of folks that are looking to sell. Some of these are folks are turning 60, and you’d be surprised at how many business owners look to retire at 65––I never understand it. They’re still tied into that age as if they’re employees. But in any case, that’s the mantra people have. The point is, because the supply out there is fairly strong, folks that are looking to buy have a lot to choose from. And there are a lot of opportunities out there. 

Furthermore, there are a lot of people who have considered buying a business and found themselves trapped, for lack of a better term, by the events of 2020. They came out of the pandemic and said, “You know, I always wanted to be a business person. I want to step into it, and I’m going to do it now. Mortality looks us all in the face, I guess, and there are people who are acting on their bucket list. 

So those are the forces—that means there’s a good supply of companies out there. And there’s a pretty good supply of buyers out there. And that’s what you need to get a market, right? And then, on the other hand, we have interest rates, which people are crying about, but at the end of the day, they’re still relatively low. 

MC: Is it possible that an owner could use an M&A deal to grow the foundry business and not relinquish his or her interest in the company?


Dinehart: Absolutely—when we say selling, it doesn’t necessarily imply 100%. Typically, a sale of company equity is for a control position of 51%–100%. However, with the right buyer and seller, it can be for 40%. I did one for 22.5%.  
It may be somebody who’s looking for a partner to help them grow further––maybe they feel that they’ve hit a wall, and they need assistance to move up to the next step. The buyer may have financial resources but not the operational expertise they need. And they want to make sure that the seller continues to have skin in the game. So, they may want 51%, or 60%, or 80%. But the point is, the buyer wants to make sure that whoever’s operating that facility is going to continue to operate that company in the future. 

MC: What are some other common scenarios for selling in this market?

Dinehart: Competition that a small foundry owner faces is an important driver here, unless they’ve carved out a really strong niche for themselves. It may be that they need to get a lower cost of operation, which they can find by selling to a strategic partner. Maybe they just want to have a liquidity event. Or maybe they’re worried about having 100% of their wealth tied up in that operation and they want to diversify their portfolio a little bit, but they still want to keep part of the foundry. The idea is that later on, down the road, there’ll be another sale, because almost any financial buyer that’s stepping in is going to want to sell––they’re going to want to see the company grow over three, five, seven or 10 years and then be resold. So that foundry owner will get a second liquidating event later on down the road. 

Sometimes it’s a health issue, or it’s a personal issue—divorce being a primary one—where the foundry owner is willing to sell. Another thing is family. Many people think their kids are “mini me’s,” and the truth is they’re not. The owner may realize their kids aren’t qualified and so, for the family’s sake, they’re going to sell. 

There’s a whole variety of reasons for an owner to sell. And by the same token, the percentage that they want to sell will vary with each one of those reasons.
MC: What are the potential industry-wide benefits of consolidation? 

Dinehart: From a casting buyer’s perspective, if you’re using a small foundry as one of your suppliers, you would be looking at spreading some of the risk that is associated with a small individual operation over a larger operation. 

For the smaller foundry perspective, the supply risk is reduced in terms of being able to access raw materials. You may also be dropping your raw input costs, because, all of a sudden, you’re part of a larger group, and therefore have more buying power in the marketplace. 

There’s also the benefit of sharing of scarce human resources. When a large foundry buys a smaller one, they are picking up skilled labor and additional resources. This includes the experienced workforce––human knowledge that you can bring into your company that you can’t always easily buy in the marketplace. Sometimes the only way you’re going to get them is by acquiring a company.

And then finally, from a salesforce perspective, when a group of foundries buys a new foundry, with casting sizes and materials they haven’t had before, you’ve increased the palette of what the sales team can bring out to the marketplace and better respond to your customers’ demands. 

MC: If I’m a castings buyer for a manufacturer, should I be concerned by a trend of large, corporate foundries rolling up smaller foundries? 

Dinehart: There are a couple of things you could be concerned about if consolidation goes too far. If that happens, then the consolidators may end up with pricing power, which can affect your cost of goods, obviously, as a manufacturer. 

But that’s a very macro picture, and the truth is, these things are driven by micro, meaning it’s individual companies and individual product lines. Consolidations can reduce your overall cost. If I’ve been sourcing castings with one company for many years and now they have a new product line, I don’t have to go out and find that elsewhere. 

And it may be a question of reducing my supplier risk, like we’ve talked about. Before I was going overseas, but now my main supplier has it, and there may be some pricing advantages. So, there’s pluses and minuses on both sides.
MC: What is it about the metalcasting industry that makes it an attractive investment for potential buyers?

Dinehart: The thing is with the metalcasting industry, the stuff they make can’t be made virtually. You’re making something that’s real, and what it comes down to is, it’s kind of a bedrock industry. You have to have things out there that the rest of the economy is built on. 

And it’s not something like an 8-track tape that’s going to disappear when some type of new technology comes along. Even with 3D printing, additive manufacturing––it may supplement the industry but it’s not going to replace thousands of years of metalcasting. And certainly not in the context of any investment environment.