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The FECC Disapproves of Sherwin-Williams’ Latest Acquisition - Can Valspar Close the Gap?

March 12, 2014 | About:
Victor Selva

Victor Selva

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Acquiring rivals is the most efficient way for a company to increase market share. However, the buy-out is the easiest share of the operation. For example, the acquisition of an important market competitor can call the attention of regulatory offices and anti-monopoly regulation. That has been the case of Sherwin-Williams (SHW) when acquiring Comex in November 2012. Besides the legal implications, the process is compounded by economical loses. More specifically, the Federal Economic Competition Commission’s disapproval means that Sherwin-Williams’ is inefficiently competing with market rivals. One of those rivals is Valspar (VAL). Can Valspar take advantage of the FECC’s ruling and shorten the gap with its main competitor?

Charity for Research

Businesses are commonly talked down when making donations. Critics argue that behind all charities done by big companies there are hidden interests. However, interests are always naked to the eye that wishes to see. For example, Valspar has recently donated $1 million to the University of Minnesota. “This gift from Valspar allows us to grow our undergraduate materials science and engineering program and outfit the new lab with state-of-the-art equipment that is second to none,” said Frank Bates, head of the University’s Department of Chemical Engineering and Materials Science. He added, “We are thankful for Valspar’s support and forward-looking mission to help us build one of the best materials science and engineering programs in the country.”

Then, what is the corporate benefit? The competitive engineering program will attract the youngest, most talented and capable researchers. In other words, Valspar will have at its disposal an important research pool from which to draw quality human resources and groundbreaking research, with the aggregate benefit of not having to maintain the laboratory. Hence, the grant is charity and long-term investment simultaneously. Because the greatest cost to research is not research itself, but the capacitation of human resources. This is a promising and intelligent investment for the long term in any way that it is looked at.

Restructuring Profit

Currently, Valspar has seen some decline in overall performance. Profit losses have been identified and associated with restructuring capacity. Nonetheless, the restructuring is addressing key issues for future growth. The firm’s competitiveness can be improved if raw materials are concentrated in a smaller number of suppliers, an achievable goal since most raw materials are petroleum-based derivatives, minerals and metals. Should the firm concentrate supplying clients, the benefits would materialize in operative costs, a stable supply and consistent prices.

Another issue that is out of Valspar’s reach is customer economic cycle sensitivity. So far, the impact has been seen on its industrial product lines and customers. In the end, such business characteristics place an important degree of uncertainty over long-term total sales and profitability, a context that is further aggravated by weak coatings demand for general industrial products, mainly for off-road equipment, pipelines and shipping containers.

Promises of a Stable Future

A stable growth has been secured via acquisitions and smooth integration. The addition of Australian based Wattyl, the American Ace Hardware and Italian Inver Holding gave the firm additional international exposure, while diversifying brand portfolio, increasing retail presence in the U.S., and strengthening market positioning for industrial coatings.

Acquisitions have been supported by measures to lower its cost structure and increase operative efficiency. Hence, analysts augur a promising long-term performance on the back of volume increases in both the paints and coatings categories. Last, the American, Chinese and European markets are expected to drive growth through the new Love Your Color Guarantee color assurance program, affordable products for the housing market, and a comprehensive suite of premium Valspar paint, respectively.

Disclosure: Victor Selva holds no position in any of the mentioned stocks.


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