May 2012
By P. Jason Ward Managing Director - Industrial Practice Leader RSR Partners Greenwich, CT The US economy exhibits all of the attributes of an underpowered engine struggling to push a heavily laden truck up a long, low grade. Decades ago, four of the eight cylinders of the engine of the US economy involved the industrial sector, including light and heavy manufacturing, aerospace, defense, energy, automotive, high-technology manufacturing, logistics and supply-chain and industrial services. Today, those sectors represent perhaps only two of eight cylinders and they are laboring mightily to power the US economy out of its multiyear slump. Like a heavy truck, underpowered and moving uphill, building speed and momentum is difficult.
Every bump in the road is more keenly felt. The signs of recovery are there, however. In the primary materials segments, a number of manufacturers which have reduced capacity and shuttered plants are now struggling to meet the demand in certain key areas such as raw materials and building block chemicals. But the demand is inconsistent across segments. In the energy sector, upstream from refining to exploration and extraction is robust, yet downstream, distribution, retail and consumer consumption remains anemic.
Both the aerospace and defense sectors are subject to variability and uncertainty on the geopolitical front. Moreover, leaders of those businesses are cautious with the unpredictable policies emanating from Washington. Despite the trepidation and uncertainty in many areas, there are unmistakable initial signs on the employment front of a bullish outlook for US manufacturing. The senior leadership teams of global manufacturing companies are seeing a convergence in the cost of labor between regions.
The rising cost of raw materials over the past five to seven years, and cyclical transportation costs of manufactured materials from sources in the Far East have caused companies to embrace the practice known “near sourcing,” which is bringing manufacturing back to North America and has certainly fueled the rebirth of the maquiladora phenomenon in some areas south of the border. No discussion of the economy and its recovery would be complete without contemplating the part that private equity firms will increasingly play in the recovery. In some cases, private equity has already stepped in with investments in businesses across a host of sectors. As always, the percentage of deals done is a small fraction of the deals assessed and evaluated.
Over the last few years, however, there has been a marked increase in the level of inquiry from private equity firms interested in hiring senior talent to turnaround or run their struggling portfolio companies. But the level of inquiry remains disproportionately high related to the number of deals done on a historic basis. Likewise, distressed debt investment firms have made notable acquisitions in transportation, logistics, and manufacturing arenas. Yet, as is the case with much of corporate America, most firms are conserving their cash and watching for reliable signs that we are leaving the bottom of the market. There is a desire and a need for talent.
Companies are selectively adding executives to their bench strength - in the areas of sales and marketing, human resources and finance. As production is slowly increasing, operations professionals are also becoming highly sought after. Traditionally, three to five years is the period for a private equity firm to seek their exit strategy: an IPO, or a sale to strategic or financial buyers. Sensing that there may be many more months of economic sluggishness, and determined to enjoy growth for as much of their time horizon as possible, these days private equity firms seem content to allow the market to continue to bump along at its present level, near the bottom.
They are not yet motivated to acquire new companies or aggressively hire new talent until valuations gather more headway in this upturn. The cylinders represented by housing, the stock market, and consumer spending that have had a significant part in powering out of almost every other economic downturn, remain off-line. Companies engaged in heavy manufacturing, aerospace, electrical and electronic components, and industrial tooling are selectively looking to add talent that not only enables them to examine the normal adjacencies when considering acquisition targets. They have also expressed a strong desire for a forward thinking leader to evaluate technology and the experience that resides within the company to be used in an opportunistic way.
The goal is to acquire a business that represents a new market segment, where know-how and technology will give them an advantage as a new entrant in the market sector. This is among the most encouraging of the trends we see. Clients have asked us to help them find “best in class” strategic business development, and mergers and acquisitions talent. We feel this is significant. For many companies, the box on the organizational chart labeled “M&A and Strategic Business Development” has been vacant since the third quarter of 2008.
We see the commitment of our clients to engage in a comprehensive search for this talent to be a bullish bet on the US economy in the upcoming years. The executive recruiting sector has traditionally been known as a leading indicator for the employment market. RSR Partners is enjoying an increased level of activity for searches in every staff and line function in every sector of the economy, but at a modest pace. Just two years ago, most employment sector commentaries spoke of getting used to the “new normal” and “flat being the new up.” Many companies took the opportunity to rationalize headcounts, reorganize and streamline their organizations as much as they dared.
Many very good executives found themselves “on the beach,” through no fault of their own. Interestingly, the notion persists among some hiring managers that because of this reality, outstanding talent should be available, ready and willing to relocate as well as take a cut in compensation in order to come back to work. The idea that one firm had the forethought to separate the bottom ten or twenty percent of poor performers, while the rest of the industry let go of their top ten percent is illogical. Moreover, in this era of building up cash as a resource, paying the fees associated with recruiting top-tier talent is a decision that has to be made thoughtfully.
We find that by the time an organization is ready to go to executive search to build their bench strength, every avenue to find an alternative source of talent, i.e. “the friends and family network” has been exhausted.
