Tuesday, May 5, 2009
What does software, beverages and drugs have to do with the electrical industry? As you may recall, last month, acquisition activity in all three sectors accelerated.
According to Kurt Kunert of FactSet Research Systems, as quoted in USAToday on April 21, "Larger companies with resources are thinking about how to position themselves to thrive rather than just to survive."
We're seeing this in the electrical industry. Consider:
- Distributors are quietly closing branches. Based upon our conversations, we project that total branch closings may approach over 500. We've heard of closings from at least four national chains, some smaller distributors who have closed their businesses and other independents that are "pruning" unprofitable locations. The benefit - reduced marketplace capacity, which could be good.
- Conversely, according to one marketing group, the number of its electrical branches, based upon a same distributor analysis, is up. Could this mean that some independents are being more aggressive?
- Distributors who have no debt or a strong cash position are actively engaging in conversations with struggling distributors. The struggling distributors are still trying to hold on to unrealistic expectations. Over the next 18-24 months we expect accelerate industry consolidation with regional independents being the winners (not many national chains have cash.) It would not surprise us to see over 100 distributor acquisitions during this timeframe.
- If you are a small distributor in a declining market with limited/no succession plan and are tired of struggling from a cash flow viewpoint with a bleak future (market not getting back to 2007 for a bit), how much pain can you take?
- A few manufacturers have approached us asking us to keep an eye out for possible acquisitions ... sounds like they are looking for new growth initiatives. Consider the first quarter investor call comments from Kirk Hachigan of Cooper Industries, "we continue to explore a very, very interesting pipeline of new opportunities" and "we have tremendous flexibility to fund organic and acquisition growth." (investor call transcript)
- Who will be the acquiring distributors?
- What does this do for a manufacturer's distribution strategy / with whom to focus on developing stronger relationships?
- For distributors, which manufacturers should you consider partnering / committing to?
- Which distributors to consider acquiring (and how does it fit into your strategic plan?How to integrate so "one plus one can equal three?"
- How does "size" change an organization?
- How could you take advantage of this market change?
We're in the early stages of a changing marketplace that can significantly impact your growth and profitability potential. They'll be winners and losers. What will define them and how can you compete against market contraction/consolidation to drive your growth? Customer insight (research) can reveal new opportunities.
We're only one opinion. Do you see change coming? What do you think it will be?We'll be at the NAED Leadership Summit May 16-19 if you would like to discuss, (or if you are in the acquisition or selling mode, give us a confidential call to see how we can help.)