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?

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!

Loyalty & Commitment ... What are They?

I recently posted this on TED Magazine's LinkedIn site and, it seems, it's gotten buried, so I thought we'd re-start the discussion here.

We're working on a project with a manufacturer and during our discussions the topic of "loyalty" and "commitment" came up in the context of distributor programs / rebates.  Essentially, in determining "support" to provide rebate, how to define a "loyal / committed distributor and how to reward them.

In conversations with some distributors, some felt manufacturers should consider loyalty / commitment as something other than sales volume, or sole line relationship, to the manufacturer, but they couldn't define what the "something other" should be (and be something easy to measure and that wasn't too subjective (and hence left to a salesperson to decide!)

In speaking with distributors, they want a manufacturer to be "loyal" to them and to reward them for their "commitment". Manufacturers want the same thing. But most often both parties are doing business with competitors (distributors representing multiple lines, manufacturers selling to multiple distributors in a marketplace covering a comparable customer base - since many manufacturers have barely selective or saturation distribution policies.) Both want to increase their sales and profits.

So, what should be the definition of loyalty? Commitment? Are they the same? How to define, and measure? Or just tie to sales and share the profits (rebate!)?

A Hesitant Marketplace?

Last week was a tough one for the stock market as it dropped for another week with one day dropping 280 points on a quartet of bad news ... low new hiring (only 54,000 new non-farm jobs), the ISM manufacturing purchasing managers' index fell to 53.5 in May from 60.4 in April, the U.S. auto industry suffered its first significant setback in more than 18 months (a 3.7% year over year decline), and the continued decline in home prices (not to mention that it doesn't seem as if any new homes are being built and sold!).  Coincidentally I was also speaking with some distribution management personnel, catching up on industry insights.  One topic seemed to sum up much of the industry's sentiment.

Some want blood from a turnip

Essentially the comment was that everyone seems resource constrained.  Few, if any, are doing any hiring unless it is opportunistic or to grow a niche / target area.  Business owners are concerned about the nascent "recovery", taxes, healthcare, government regulations, the banking system (and lack of credit), the deficit and more.  Employees are focused on keeping their jobs and being able to make their mortgage, given the dearth of available opportunities (jobs).

While there are pockets, and market segments, that are strong, there are a comparable number of areas and segments that are weak.  This marketplace dichotomy, especially after the recent recession, makes business owners hesitant.  And hesitancy drives people to be risk adverse.

While no one had an answer, the consensus was that many business owners may wait till 2013 (elections and the "start" of the new healthcare initiative) to decide if they want to return to being a growth company ... preferring to settle and be a lifestyle company at this time.  While sales have stabilized, or grown for some (especially industrial or energy efficiency-oriented companies), profits have grown at a faster rate due to personnel and expense management.

With housing down, re-locations are difficult, forcing companies to limit searches to local candidates.  Housing also tends to drive light commercial; and larger companies need to continue to grow to justify larger commercial facilities.  Is the export market the economic salvation? (It's helped many industrially-oriented distributors and manufacturers.)


Meanwhile, at the same time we're seeing some of the nationals hiring in selected areas and sniffing / making acquisitions - looking to take share.  And sometimes these acquisitions create opportunities for strong independents in those marketplaces ... are you positioned to be opportunistic when someone creates business for you?!

With many waiting, is this creating opportunities for you to profitably take share? Are you hiring to prepare for future retirements (and new opportunities) or trying to just make it for the next couple of years (and if you are, will your company be as valuable to someone else if you don't have a succession plan and need an exit strategy?)

Are you hesitating or investing and taking advantage of opportunities?