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PPG Industries Puts Focus on M&A Instead of Share Buybacks; The paint maker has struck three deals in recent months and is trying to do a fourth onePPG Industries Puts Focus on M&A Instead of Share Buybacks; The paint maker has struck three deals in recent months and is trying to do a fourth oneMaurer, Mark.Wall Street Journal (Online); New York, N.Y. PPG Industries Inc.'s finance chief is helping vet potential new acquisition targets as the paint maker opts for deals over share buybacks in the year ahead. The Pittsburgh-based maker of paints, coatings and specialty materials in recent months announced three deals and is working on a fourth. PPG and its Dutch rival Akzo Nobel NV are currently bidding for Tikkurila Oyj, a Finnish paint maker. On Jan. 5, PPG offered €1.24 billion, equivalent to $1.49 billion, for the company; Akzo followed on Jan. 18 with a bid of €1.4 billion. As Tikkurila evaluates both offers, PPG continues to scout for additional takeover targets that would grow its customer base or expand its array of products. PPG's management plans to give priority to mergers and acquisitions over buying back shares, Chief Financial Officer Vince Morales said. "There's been much more value created in our space via acquisition as opposed to share repurchase," Mr. Morales said, pointing to metrics such as the rate of return after taxes to measure increases in value. Chief Executive Michael McGarry, who has been in the role since 2015, on a Jan. 22 earnings call said he would be "exceptionally disappointed" if the company bought back any shares in 2021. PPG most recently bought its own stock back in the fourth quarter of 2019, deploying $150 million in cash. Over the past decade, the company used about 36% of roughly $22 billion in cash on share buybacks, compared with 26% on acquisitions. PPG allocated more money toward share buybacks than toward M&A during this time because the company didn't see that many attractive acquisition targets, said Mr. Morales, who has been in the role since 2017. Many companies put their share buyback plans on hold at the onset of the pandemic in an effort to preserve cash . While some resumed those purchases in the second half of 2020, others continued to hang back. PPG didn't pursue buybacks in the second or third quarter in part due to the pandemic and economic uncertainty, according to a spokesman. At the end of 2020, the company had about $1.5 billion of an existing share repurchase authorization left which doesn't have an expiration date. Still, the company spent almost $2 billion on acquisitions from 2015 to 2019. In December, PPG closed a transaction to buy Greensboro, N.C.-based coatings maker Ennis-Flint Inc. in a deal valued at about $1.15 billion. In January, it also agreed to acquire coatings manufacturers VersaFlex based in Kansas City, Kan., and Wörwag, based in Stuttgart, Germany. PPG declined to disclose what it will pay for them. The company doesn't have a set target for acquisitions, according to a spokesman. The company in recent months raised prices on various products to offset pandemic-induced revenue declines in parts of the business, such as coatings for airplanes or paint for car repair shops. Despite those hikes, PPG last month reported a 7.8% drop in profit to $272 million for the fourth quarter. PPG's desire for more acquisitions makes sense because the company generates strong cash flow, said Ben Nelson, a senior credit officer at Moody's Investors Service, the ratings firm. "The balance sheet strength that they have today creates a lot of opportunities with respect to their fragmented industry, where M&A opportunities are prevalent," Mr. Nelson said. But acquisitions don't necessarily guarantee higher value for shareholders. Mergers and acquisitions generally create only modest value for investors over a period of five or more years compared with simply investing in a stock index fund, said Duncan Smithson, senior director of M&A at consulting firm Willis Towers Watson PLC. Over a period of one to three years, companies involved in M&A may not create any shareholder value, he said. Nevertheless, some acquirers created value at a higher rate in late 2020 than in previous years. North American companies that closed acquisitions in the fourth quarter recorded an increase in adjusted returns of 5.9 percentage points relative to MSCI Inc.'s world index for developed markets during that time. This was the region's first positive quarterly performance for deals in three years, Willis Towers Watson said. |
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