Just when you thought merger and acquisition (M&A) activity in the pro dealer space couldn’t get any hotter, another burst of deals was announced recently. US LBM acquired Feldman Lumber and Kodiak Partners bought AO Inc., a commercial door distributor. Within a week, Kodiak followed up with the acquisition of Barnsco, a Dallas fabricator and fabricator of rebar and concrete accessories. Builders FirstSource also recently undertook a pair of acquisitions, adding Truss Rite LLC and West Orange Lumber Company. Is all of this acquisition activity sustainable or will it taper off?

There is no crystal ball or reliable benchmark that can tell us what will happen to the pace of M&A activity. However, examining some of the underlying fundamentals that are at work confirms our belief that the pace of M&A in the LBM segment will continue to be strong for the next several years.

The first and most important element is that there be a supply of companies seeking to be sold. Accounting for the number of local and regional players that remain independent and combining that number with the regions and divisions of large national players that could be divested, there are plenty of sale candidates out there. In those cases where the owners seek to retire, to pursue other opportunities or to place their capital elsewhere, companies will approach the market seeking buyers.

With regard to buyers, the ranks of strategic and private equity investors seeking to capitalize on the upswing of the building industry appears to be growing. Given the consensus view that the next several years will be very strong in the building segment, there are a variety of long-term players seeking to double down as well as new entrants who desire to play this next market run. The new entrants include private equity investors with record amounts of capital that must be invested. These willing buyers find themselves armed with ample debt capital in the current market. As long as cheap debt is available and that debt is light on restrictive covenants, numerous buyers will be able to achieve the equity returns they require by buying LBM distributors.

Another key indicator to watch in predicting the pace of M&A activity is the movement of the stock market, which provides several key forms of guidance. First, the publicly traded pro dealers signal to potential buyers the strength and direction of earnings in this segment. The stronger the earnings of the large public players, the more likely it is that local and regional companies are performing well, too. This makes those players more attractive acquisition candidates.

Also, a generally increasing stock market creates wealth for various potential acquirers with public holdings. Finally, where privately held companies are often valued on trailing earnings, the stock market is considered to be a strictly forward-looking mechanism for determining the value of publicly traded companies. As long as the stock market continues to perform well, the best available predictor of future corporate earnings will continue to serve as a tailwind to M&A activity.

It isn’t possible to predict how many transactions there will be in the balance of the year. However, until there are seismic changes in the pool of willing buyers and sellers, the availability of debt capital or the direction of the stock market, the overall pace of LBM merger and acquisition activity should remain strong.