What Would You Do With $500,000,000

If you were Graybar?

Yes, it's a lot of money and many people are wondering, perhaps speculating, on what Graybar will do with a half a billion dollar unsecured loan. This gives them $300 million more than they had before.  It's an intriguing question and ranges from "nothing" to "retiring prior loans / lines of credit that had higher interest rates" to "how can they spend the money?"

(And since Allen and I had some time to spend on the phone today, we thought we'd try to spend someone else's money!)

From asking around, we've learned:

• There is no personal liability.
• There are no real estate attachments
• There are no stock attachments nor A/R commitments.
• Part of these loans were renewal of old loans and cleaned up documents from as long ago as 5 years ago.

But, according to some "in the know", there are plans for the money.

But remember, the plan could be keeping the money "dry" and not using it ... essentially saving it for a rainy day.

But, why post something if we can't share ideas on how it could be used....

• $500,000,000 would buy about $2 billion in distributor sales, so could Graybar go on a buying spree? These could be electrical distributors, automation houses (they bought AVAD), lighting distributors, etc.
• Perhaps an expanded renewables initiative .... solar, entering the smart grid marketplace?
• Do they need a cash cushion for business they want to pursue, especially if they are concerned about receivables / delayed payment?
• Could some be invested into their industrial automation strategy? They are hiring many people around the country now (don't know if any are funded by Schneider Electric).
• Or in more salespeople (Grainger is expected to hire 300 new inside salespeople this year).  After all, Graybar's Bill Mansfield was quoted as saying manufacturers are reducing their salesforces
• Perhaps enter a new business through an acquisition ... buy a solar distributor? a PT distributor? an ESCO to support their energy initiative?
• Or expanding their utility business by purchasing HD Supply's utility group (which now includes their electrical group)?
• Or funding the opening of new locations (they are looking to open 7-10 new locations per year for the next several years)
• Maybe take a page from Grainger and do end-user marketing to build their brand and drive business?
• From a financial viewpoint, is the loan viewed as liquidity / cash and an asset for a potential acquirer of Graybar, enabling some internal funding of Graybar being acquired? Could someone like Motion Industries (Genuine Parts) be interested in entering the electrical industry? Or another large distribution company? Or a private equity firm?

Lot's of choices.  With cash much can be done.  It's doubtful that Graybar invested its time to do nothing with the money.  So what do you think they should do? If you had this much money (to spend in the business), how would you spend it?  What could be a "game changer" to accelerate their business?

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!

Infor Acquires Lawson Software

Over the past few months rumors have circulated that Infor was looking for the best fit software company to acquire to complement its business. Infor has over 75,000 customers in a number of verticals ranging from distribution to healthcare, automotive to manufacturing. Finally comes word of an agreement for Lawson to be acquired by Golden Gate Capital (GGC Software Holdings, Inc.) and Infor for a deal valued at $2 billion. Click here to read the press release.

The fit for Infor and Lawson is that they both have worldwide user bases that generate huge cash flow streams. Lawson bring to the new partnership a CLOUD offering for internal and external applications. The External offering enables companies to test the Cloud concept before considering a more extensive offering such as Amazon EC2. The Internal Cloud offering offers the business user the opportunity to consolidate their IT infrastructure, while reducing their costs and reallocating IT staff to more strategic activities. To read more about this offering click here.

Within a very short space of time, the electrical industry has witnessed a couple of high profile companies be either rolled up (Activant being purchased and emerging as Epicor) or making an acquisition (Infor along with a Venture Capital company acquiring Lason).

The question becomes, what does this mean to electrical distributors? Will these companies continue to focus and allocate resources to improving their systems? Will customer support be strengthened? Will new products be offered and the systems be more robust? Or will the companies be more financially driven to enable returns to their shareholders?

While we wish each company the very best, what do you think the affect will be if you own an Activant product (P-21, Trade Service Systems Array, Eclipse or Eagle) or an Epicor product or a Lawson product or an Infor SXE or SXA+?

And how does a Cloud offering affect your approach to your ERP needs? Do you foresee yourself considering a Cloud offering in the next 3-5 years?