Merger and acquisition activity continued apace throughout the supply chain in 2014 as suppliers such as Tecomet sought to scale capabilities and expand international markets in order to meet the needs of OEM customers, who are themselves consolidating.
In a matter of two weeks in August 2014, Tecomet announced the acquisitions of Symmetry Medical’s OEM Solutions and 3D Medical Manufacturing. Completion of the two acquisitions allows Tecomet to establish a physical presence outside the U.S. with a total of 18 facilities in five countries, and grows the company’s employee headcount from about 700 to 3,000. These strategic moves also position the company as the largest contact manufacturer catering to the orthopaedic industry.
M&A activity will continue at the supplier level as OEMs merge and seek to outsource more to a lesser number of preferred suppliers, says Bill Dow, Tecomet’s CEO.
As a preview to an article on supplier consolidation trends coming in the March print issue, here is an excerpt from BONEZONE®’s interview with Dow on what’s driving supplier M&A.
BONEZONE: Consolidation is expected to continue at the orthopaedic device company level. Will we see more consolidation at the supplier level? Why?
Dow: This merger (with OEM Solutions) has piqued people’s interest and, I think, given more recognition to the fact that as our customers get bigger, they want to deal with bigger entities that offer them more security both from a quality system standpoint and a fiscal viability standpoint.
You’ll continue to see consolidation among the bigger contract manufacturers, but just as importantly, with the thousands of smaller contract manufacturers that are going to have to find a bigger partner in this business space to maintain viability moving forward.
BONEZONE: Several suppliers—Autocam, CoorsTek Medical, 3D Systems, Precision Engineered Products—completed recent acquisitions. Would you like to throw in your two cents about any of these strategic moves?
Dow: (Laughs.) I think it supports what we’ve talked about.
It’s heating up. Think about it: the electronics business is totally contract manufacturing. Automobile companies don’t manufacture cars anymore; they assemble parts. Pharmaceutical companies contract out pill and capsule making. Medical device has been slower. We’re about 20 to 25 percent into the conversion, so there’s still 75 to 80 percent to come out, and it will take a while. But it does provide all of us with a significant opportunity to grow. To compete in this environment, you either have to have something special that people can’t get anywhere else or you have to have size and breadth to service customers and to provide competitive prices.
BONEZONE: In addition to organic growth, you’ve completed several acquisitions in recent years to expand. Can we expect Tecomet to grow more through acquisitions in the near future?
Dow: Tecomet has grown organically at an excess of ten percent for the last six years, so we’ve experienced healthy, organic growth. We also closed three acquisitions before we purchased OEM Solutions. We’re growing both ways. Yes, we will continue to look at acquisitions that make sense and add new capabilities that we don’t have. For example, we don’t do plasma coating right now; we outsource it. If we could find a business that would help us bring that into our own offerings, that would be attractive.
We probably won’t look as much as we have in the last couple of years as we integrate the OEM Solutions business, but we will keep our ear to the ground and if the right opportunity comes up, we won’t hesitate to pursue it.
BONEZONE: To your point about orthopaedic device companies seeking to outsource more, what type of market growth are suppliers experiencing from orthopaedic OEM outsourcing?
Dow: The underlying markets in orthopaedics are growing at two to four percent; some are growing faster than others. There is another two or three percent that’s coming as a result of the OEMs taking more of their contract manufacturing out to providers, so that’s providing a tailwind of two or three percent growth in the market. There’s an additional two or three percent growth for the bigger contract manufacturers through consolidation. As the large companies look at the thousands of suppliers, they try to move from the smaller suppliers to larger suppliers. That has contributed to our organic growth over the last several years. That explains Tecomet’s ability to outgrow the market organically.
Symmetry is a big entity, and as a public company, they had not been growing in a significant way the last few years —sometimes they were up two or three percent, and then they were down. We don’t think we’re going to be able to turn them into a ten percent growth business, but we do think we can turn it and get good single-digit growth in the next two or three years.