2004 M&A update: an "average" year, marked by some major transactions.

For mergers and acquisitions, 2004 turned out to be an average year as there were 15 North American based transactions, which is a reduction of about one-third from 2003. The transactions were rather evenly divided between architectural and industrial coatings with no significant automotive transaction occurring.

COMEX-PPI DEAL TOPS CHARTS

The largest transaction was the acquisition of Professional Paint (PPI) by Comex from The Jordan Company. Comex is the leading architectural paint company in Mexico and had been looking to expand its market in North America. PPI was desirable to Comex due to its management strengths and established, well known names in the industry--Frazee, Kwal, Parker, General and Ideal. This deal highlights a trend of foreign companies willing to invest in the U.S. due to its relatively stable economy and the current low currency value for the dollar.

Another large paint transaction was the acquisition of Duron by Sherwin-Williams. This deal expands S-W's presence in the U.S. architectural coatings market, particularly in the professional contractor segment. Duron is a leading architectural paint company in the eastern U.S. servicing the painting contractor, building and DIY markets through over 200 company owned stores. The reported value of this stock transaction was over $250 million. This deal demonstrates the experience and sophistication of Sherwin-Williams in the acquisition of U.S. businesses. The success of this acquisition, like most acquisitions, depends upon the ability to integrate the businesses. Based upon the initial market results, the buyer and seller worked together effectively to insure a smooth transition and to maximize the potential of these newly joined operations.

During 2004, Sherwin-Williams also acquired Paint Sundry Brands, which was a privately held, leading manufacturer of paint brushes and rollers sold under the Purdy and Bestt Liebco brands. The acquisition gives Sherwin-Williams a strong brand presence in coatings applicators and was part of the firm's growth strategy to provide products and services to paint contractors and DIYs in various distribution channels.

Another significant transaction was the divestiture of the Coronado and Lenmar businesses by Wattyl to Insl-X. This deal was primarily driven by economics: financial results for the two U.S. businesses were not satisfactory. The buyer should be able to benefit from synergies and cost savings from consolidating duplicative functions. The deal marks Wattyl's final exodus from the U.S. and strengthens its profitability and cash position. Exiting an unprofitable U.S. business requires the seller to meet a number of obligations and in this case, Wattyl met all of its obligations and exited gracefully from a most difficult situation.

Olympus was also an active acquirer of paint related businesses during 2004. In February, the company acquired Homax from Harbour Group. Homax is a leading manufacturer of branded specialty household products such as cleaners, strippers, drywall repair products, stain removal and wood and concrete surface preparation chemicals. The firm was attractive to Olympus for its strong base of products, distribution channels and management team. In October, Olympus made two additional acquisitions: Bix Manufacturing and Site-b Company. Bix, a manufacturer of paint strippers and specialty cleaning products, will certainly augment Homax's current offerings in those areas. Site-b, a manufacturer of patented paint and compound mixers, complements Homax's product lines and distribution channels.

FAMILY-RUN REGIONALS UNITE

A significant merger that occurred during 2004 was that of Rodda and Cloverdale, two well-established, family-run, regional paint firms. The merged operation will retain the Rodda name in the U.S. and the Cloverdale name in Canada, and each operation is to be managed independently. This merger should result in increased product offerings and shared business strengths and management expertise.

Another transaction was the acquisition by Diamond Vogel of Four Seasons Paint. This acquisition followed the 2003 acquisition of the Western division of Davis-Frost and fulfills Diamond Vogel's goal of expanding its industrial business and providing additional production capacity.

The acquisition by Coventry Coatings of North American Technologies (NAT) illustrates a buyer venturing into new technologies. The acquisition represents a major move by Coventry, who has traditionally focused on auto refinish paint, to industrial coatings. The deal will expand Coventry's paint product offerings and take advantage of NAT's established name.

Other paint deals for 2004 included the acquisition by Hentzen of BASF's coating facility and the acquisition by Quest and related financial investors of Raabe Paint.

WILL RISING RAW MATERIAL COSTS AFFECT M&A DEALS IN 2005?

Merger and acquisition negotiations have always been a complicated process, and during 2004, a number of factors besides the usual price, business, tax and other due diligence negotiations were factors. One major irritant was the substantial increase in raw material prices. Virtually every major coatings firm suffered raw material cost increases over $100 million. Although computerization enabled almost all coatings firms to immediately recognize the impact of these cost increases; in many cases, primarily industrial coatings, it became difficult for sellers to transfer these costs to their customers on a timely basis. This resulted in some lower pricing for certain transactions and in other cases, deferred transactions that would have occurred during 2004 until 2005.

Another factor affecting business was the cannibalization of new accounts. Here, existing firms made great efforts to maintain margins with existing customers while approaching new customers with predatory low pricing. The majority of coatings firms recognize that this practice will only injure the industry for the future. Fair and consistent pricing is essential for long-term success of the paint industry and can greatly affect the reasonable transition of business ownership.

Transaction values for 2004 were slightly above average and we expect this trend to continue. We believe that 2005 will be a relatively stable year as the industry has fundamentally absorbed the plague of increased raw material prices that descended upon the paint industry in North America (and worldwide) during 2004.

Stephen Einhorn is founder and president of Einhorn Associates, a Milwaukee, WI-based consulting firm.