Recent Acquisition Thoughts

The last couple of weeks we've seen a couple of transactions that could be interesting:

• First is yesterday's announcement that Hajoca, the sister company of CED, acquired HD Supply's plumbing and HVAC group.  It wasn't much of a surprise that HD divested of the plumbing group.  Their "contractor" groups have underperformed since HD was created as an amalgamation of acquisitions. And bringing in someone from Ferguson to run it was a signal. It begs the question of "when will HD Supply sell its electrical group?"  They did sell their Canadian electrical group to Sonepar.In thinking of potential acquirers that make sense ... there could be some synergies for Sonepar (as well as some new territory expansion); CED given that Hajoca knows the right people and CED is always an acquirer at the right price; Rexel ????.  It doesn't make sense for HD Supply to sell the parts piecemeal (too many legal expenses).  We wouldn't be surprised to see something happen this year as the outlook for resi / commercial construction remains dismal.

• Secondly, Cree purchasing Ruud Lighting, which also sells to distributors under the BetaLED name.  Interesting that Cree is expanding into the fixture business.  Gives them 2 sets of reps selling LEDs, at least for now, and a business that is known for selling direct to contractors (Ruud). Will this put any more pressure on the major lighting companies to expand their LED offerings? Does Cree think it can accelerate LED sales? Is the fixture business more profitable than being an OEM supplier? Or did Cree think that competition for the LEDs is increasing and it needed its own fixture manufacturer to ensure its business?  With other electronics companies entering the LED space, are there more OEMs out there?  Click here for an interesting interview with Cree and Ruud but the question of "how will this impact the distribution side of your business" wasn't asked.  As a distributor, would you prefer to purchase from a BetaLED, owned by Cree, or purchase from one of the leading fixture manufacturers (Cooper, Lithonia, Philips Lumieres (Thomas Lighting, Lightolier, etc), Juno) or is the name of the game "value-engineering"?

And according to sources, we should expect more distributor and manufacturer acquisitions by the end of the year as there is a drive for market share and diversification at the right price.  As the market is changing, are you having "what if" sessions within your company?  What do you think of these acquisitions?

Free Agency and Electrical Distributors

The recent signing of the NFL collective bargaining agreement signaled the start of the football season.  And pre-season has been a frenzy with a record number of available free agents, a few signing for megabucks, most simply looking for a new home (and a paycheck).  And just like there were no signings (free agents or draft choices) for over 4 months, so has the electrical industry gone without many acquisitions for awhile.

But it looks like a feeding frenzy is starting.

Over the past few months there have been a number of acquisitions throughout the country ... and with some common attributes.  The commonalities:

• Contractor-oriented distributors being purchased


• Companies with limited / no succession plans

Couple this with a tepid, if not disheartening, outlook for the construction markets; the fact that some, if not all, of these companies had no, or minimal, profitability in the past few years; and that the acquisitions represented some strategic synergy for the acquirer and you can see why companies could be enticed to sell.  They saw an opportunity to, like a football player, "take the money and run."

The deals we're referencing include CED purchasing Yale Electric (PA), 3E purchasing City Electric (IA), Sonepar's recent purchase of Independent Electric (CA) and there has been a small deal in west Texas.  We're also hearing rumors of a few other deals in the pipeline.

Which brings us to the question of "how long can some contractor-oriented distributorships hold out in the face of nominal industry performance, uncertain healthcare expenses, taxation concerns and general business uncertainty, especially as we see the industry dynamics favoring companies with a penchant to invest in energy efficiency, solar, datacom, safety, institutional sales and more.  The distributor of tomorrow appears to be either a well-diversified company or a niche player.
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Companies that have been heavily concentrated in the contractor-oriented construction segment, in many markets throughout the country, are challenged to deliver a return to their owners. And if there isn't an avowed succession plan, perhaps now is the time to consider positioning the company for a sale (like the above companies did).

Optimizing your selling price requires planning to improve your top and bottom line while showing an acquirer that there is more value in your business than meets the eye.  Consider:

• Have you gotten your back office as efficient as possible?


• Have you turned on all your EDI capability?


• Are you able to identify all of your non-stock sales? Are you making adequate margin on them?


• Are you claiming all your SPA’s in a timely fashion (inside of 24 days) and therefore giving your manufacturers an interest free loan?


• Are you using a wireless warehouse?


• How fresh is your inventory? Has it gone stale? Have you got product that hasn’t sold in the last year? There are ways to get rid of that inventory.


• How are your margins? Are they the lowest they have been in several years? Do you know the 3 keys to increasing margins relatively painlessly?


• How is your ERP system working for your company? Is it causing you to lose sales?


• How good are you at collecting outstanding invoices with your customers?


• How are your customer and revenue generation issues?


• Do you know where the opportunities are in your marketplace?


• Do you have any brand equity?


• Do you really know your customers current needs?


• Do you know how your customers perceive you vs. your competition?


• Do you know your marketshare and do you have a plan to increase it?


• What is your sales plan? Your marketing plan? Your product mix?


• Where is the growth opportunity for an acquirer? Can you sell them on a vision? On your plan? Are your manufacturers vested into your strategy?

While selling a business is about the numbers, if you're not in negotiations know you still have the ability to impact your numbers? (we know it can be done ... we've done it)

So, do you see more acquisitions happening in the near future? Why (or why not)? And do you think a company can "pretty itself up" to "sign the big deal"? And what does this mean for acquirers ... will acquirers be solely Sonepar, CED and larger independents (does Rexel have the capability? will WESCO go electrical or not? Gexpro and Graybar haven't been acquirers; will Crescent finally make a deal?) 

Much to ponder.  Should be an exciting season!