On the heels of a record breaking 2003 sales year, pro dealers and specialty distributors in the PROSALES 100 remain cautiously optimistic on the 2004 residential construction economy. According to Nick Beare, managing director and head of the Paper, Packaging, and Building Products Division at Matrix Capital Markets Group in Charlotte, N.C., a middle-market investment banking and mergers and acquisitions consultancy, the bullish attitude toward the market is well-founded. As a major player in the pro dealer M&A arena, Beare says that most economic indicators point toward another stellar sales year, adding that value-added business models will play a vital role in both revenue increases and the evolving pro dealer acquisition landscape. Here's Beare's take on the 2004 pro dealer economy and M&A activity:

The primary financial factors contributing to the 2003 residential construction boom: "Without any question I think the main driver was an incredibly low interest rate environment. ... Clearly that is having tremendous influence on the dealers as a general rule. The other thing is lumber prices spiking last year in the second half. ... If you were long on inventory in the second half of the year, you had cheap lumber and you were able to sell it for a whole lot more than you paid for it. Finally, my impression is that as a result of the gloom and doom [economy] of 2002, a lot of people had cut costs and ... really tightened their belts such that when the economy did start to improve, they just came right out of the block smoking."

The availability of capital for pro dealer growth: "Obviously a lot of people are refinancing because of a very low interest rate environment. Any good corporate CFO is going to be taking advantage in both the private and public markets to access cheap capital. For the small to medium dealer, the bank market has certainly improved. We are definitely seeing more credit availability. Banks and senior lenders are clearly relaxing covenant requirements and lending is easier today than it was a year ago."

Pro dealer optimism on the 2004 residential construction market: "Everyone is wondering how long this can go on, but [they are] cautiously optimistic because all of the key drivers are in place. Still, if you ask the man on the street, nine out of 10 will say rates are going to be higher next year—you know it can't stay this way forever—and I think that's what people are hedging. But even if things tighten and rates do begin moving up, it's not like all of the sudden you go from 4 [percent] to 10 [percent]—you're not going to have the spigot literally screwed shut. It's going to slow things, but when you slow a rocket ship you're still moving pretty fast. I'm bullish—I think it's going to be a good year."

The 2004 pro dealer M&A atmosphere: "M&A is back. But it is back in a more restrained and thoughtful way. ...[Large acquisitive companies] are becoming selective about geography—they're not trying to become big just to be big, they are trying to control a market area or region, picking up single yards here and there to fill in their existing network. In addition to the geography play, there is a play toward getting acquisition candidates who bring more manufacturing and more installation. ... You also keep ultimately wondering if BMHC or Lanoga will do something with Builders FirstSource or Stock or somebody [else] to put the East and the West together. Clearly there is a bifurcation at the Mississippi River. Is there not an argument to be made that at some point the national dimension of some of these production builders makes it sensible that [some of] these guys should become one?"

On the competitive differences between semi-national pro dealers and regional or local firms: "When a big national player opens an operation, they are generally driven to work with the big national production builders, because they are well suited for that. They are going to try to take share by cutting price against existing players because they have the [scale] capacity to absorb that as a result of their volume, purchasing ability, and cost platform. So price in that market begins to deteriorate. If I have a pure distribution model, all of the sudden my margins really start to become crippled. What then happens is that the small to medium player has two options—they can try to become more value-added by offering pre-hanging, wall panels, [or] truss manufacturing, or the other alternative is to migrate to a less price-competitive area of the market. Thus, you get compression of the competitors in the market where the big guys are not able to use their pricing quite as well, which is typically the semi-custom builder."