The Wall Street Journal wakes me up today (subscription required) with an interesting piece on rising commodity prices and their connection to a recent return to favor of certain acquisition practices that had fallen by the wayside in recent decades, namely: vertical integration.
The Journal points out that a desire to control supply and prices has pulled vertical integration from the scrap heap of 1980s mergers and acquisition finance, where it lay quietly collecting standing water, breeding mosquitoes and rusting from the corrosion of inefficiency, before dusting it off and pressing it into use as a means to provide both for consistent and consistently priced supply in a commodity environment where neither existed. At Sub Rosa we noticed a surge in activity in steel as early as January. Not quite as big as the number of new ethanol plants we were asked to help finance (even though we don't really do start-ups) but close.
Other responses to pressures are also cited, namely new technologies and long-term contracts. If, however, I am dubious about Airbus locking in Titanium prices through 2015 can be chalked up to a certain prejudice about highly subsidized, multi-nation state ventures that colors the odds I give Airbus of having much of a Titanium appetite or even surviving through 2015.
The article caught my eye for three reasons. Firstly, it is interesting to see old, but perhaps once overused, arrows in the acquisition quiver nocked once again. Secondly, because I spend too much time reading Abnormal Returns, which quite enjoys the topic of commodity prices. Third, because I wonder if this is not a case of "too much, too late." Successful supply strategy requires action before matters get out of hand. (Think: Southwest's brilliant [.pdf] Jet A hedge that, at one time, had their costs at $26 a barrel, and unfortunately has now mostly petered out for them). I wonder now if it isn't too late to be integrating vertically and if some firms won't be stuck with big suppliers purchased at the peak of the commodity market and which they aren't particularly good at running. Depending on your commodity price sentiment, it could be that there will be some raw materials LBO opportunities in the next few years. There are, after all, worse things than owning a raw material supplier in a market with sinking commodity prices, but I suspect that they all involve British dentistry.