Focus returns to investment
St. Louis Post-Dispatch
June 11, 2010
by David Nicklaus
During 2008 and much of 2009, corporate America went into survival mode. The need to conserve cash trumped the instinct to invest for future growth.
As recession turns to recovery, companies are loosening their purse strings again. Acquisitions are happening that didn't make sense -- or couldn't be financed -- a year ago. Projects like Spartech's new technology center in Maryland Heights are being green-lighted.
Growth, as opposed to mere survival, is an imperative again.
"We've been looking at this project over the last couple of years, but we've been a lot more focused on consolidation efforts and cost reduction efforts," said Randy Martin, Spartech's chief financial officer.
Spartech's sales shrank by 36 percent in the past two years, but Martin says the plastics company sees growth opportunities in "green" packaging and in replacing fiberglass and PVC with materials that are more environmentally friendly. That means adding some new research capability, as well as moving existing researchers together to improve collaboration.
While investments on the scale of Spartech's, involving a new building, remain rare, there are other examples among St. Louis companies. Centene is completing a new headquarters in Clayton and considering whether to build a call center in O'Fallon, Mo.; Emerson's process-management division opened a $30 million innovation center in Iowa.
In general, companies are spending less on buildings and more on computers, lab benches and other equipment.
In the Commerce Department's report on first-quarter gross domestic product, business spending on structures fell for the seventh straight quarter. Their spending on equipment and software rose at a 12.7 percent annual rate, after a blistering 19 percent increase in the previous quarter.
Equipment spending had fallen for five consecutive quarters before the recent surge.
During the depths of the recession, the nation's capital stock was actually shrinking. That means companies weren't even spending enough to replace buildings or machines that wore out or became obsolete.
"That's not a sustainable level of investment," says Chris Varvares, president of Macroeconomic Advisers in Clayton. "We're really set up to see a significant rise in capital spending."
He says the rebound in equipment and software spending "should continue for a few years," maintaining at least 10 percent growth this year and next.
That's good news for World Wide Technology, the Maryland Heights company that supplies a variety of technology products and services. Chief Executive James Kavanaugh says sales have picked up noticeably in the last six months.
"Corporate spending had definitely slowed in a significant way over the prior year and a half," Kavanaugh said. "With information technology stuff, you can only put it off for so long."
World Wide itself continued to invest throughout the recession, Kavanaugh said, opening several new data centers and making two acquisitions last year. "I'm more bullish on the business than I've ever been," he added.
Merger and acquisition activity, like capital spending, is beginning to accelerate but hasn't returned to pre-recession levels. According to Bloomberg, the value of announced deals was up 11 percent in the first five months of this year.
Among the larger deals by St. Louis companies, Stifel Financial bought rival Thomas Weisel Partners, Savvis expanded into Canada by buying Fusepoint and Solutia gained a new product line with the purchase of Etimex Solar, a German company.
Kevin Short, managing director at Clayton Capital Partners, advises small and medium-sized companies on acquisitions, and he says 2009 was a very slow year.
"In the acquisitions area, we might be up 50 percent in the number of deals we're working on," he said. "We are seeing a very aggressive stance by some of our corporate clients."
Companies are taking down the "caution" sign and pulling out the checkbook for two reasons, Short says. One, they see some good bargains at the end of the recession. Two, they can get financing that wasn't available a year ago.
Also, Short adds, "They now believe the world's not going to end."
That level of confidence, of course, is a prerequisite for any spending decision.
