This Wall Street investment Exec says the stock market's recent turbulence isn't choking off the flow of capital for companies in the acquisition hunt.
Editor's note: Because independent family-owned distributors remain the channel of choice for electrical supplies in most markets, the electrical wholesaling industry is consolidating at a much slower rate than other distribution industries. In fact, last year the 250 largest distributors accounted for 44% of the total sales through electrical distributors. Over 3,500 smaller distributors of electrical supplies did the majority of the business.
However, consolidation is a real and growing trend in the electrical market, and it will most likely gain speed before it slows down. To track this trend, Electrical Wholesaling magazine will run an occasional series of articles in this department on industry consolidation. In the first of these articles, EW picks the brain of one person who has had a bird's-eye view of M&A activity in distribution-based industries: Richard Witmer, mergers and acquisitions partner at Brown Brothers Harriman & Co., New York, N.Y. Brown Brothers is a 175-year-old private bank that provides capital and consulting services for M&As. In this article, Witmer talks about consolidation activity in the electrical wholesaling industry from his Wall Street vantage point. Anyone interested in following up on his ideas can send him e-mail at email@example.com.
Electrical Wholesaling: Twenty of the largest 250 electrical distributors in 1997 chose to merge or be acquired by larger companies. What's behind these mergers and acquisitions?
Richard Witmer: In most industries, customer preferences drive consolidation, and electrical distribution is no exception. Utilities, industrial concerns and electrical contractors want to deal with a reduced number of suppliers. They want to take more costs out of the total supply chain and are seeking a broader range of value-added services from a limited number of vendors. Those with a regional or national presence prefer suppliers with similar service capabilities.
Advances in information technology also contribute to consolidation in the electrical market. The nature of the business and the growing sophistication of customers necessitate continuous improvements in computers and related support systems. Consolidation is one way to spread the cost over a large revenue base.
Demographics are another consideration. Many successful electrical distributorships are second- or third- generation family companies. As the current owner-managers contemplate management succession issues, they have to balance the investment requirements of their businesses with the liquidity desires and estate-tax needs of their shareholders, many of whom may no longer be involved in day-to-day operations.
The third factor is a steady and dependable source of capital. When public and private equity debt markets are healthy, they also add impetus to M&A activity.
Bucking these trends toward consolidation are many distributor owner who still prefer to remain autonomous. In addition, many of their customers, particularly contractors, prefer dealing with owner-managed businesses. In an industry where electrical contractors are the largest customers for so many companies, this is a factor that you can't discount. Contractors like the fact that their business often constitutes a meaningful percentage of an electrical distributor's revenues. When this is the case, they can command superior levels of service.
EW: Given the recent volatility in the public equity and high-yield markets, do you expect this consolidation activity to continue?
Witmer: Most of the factors driving consolidation in the electrical wholesaling industry are long-term trends. The capital markets in the U.S. are the most highly developed in the world. In the last five years, for example, there has been a huge increase in committed but uninvested private equity. Notwithstanding the recent turbulence, capital continues to be available to well-managed consolidators.
EW: What is your perspective on WESCO's acquisition of Bruckner Supply Co., a $225 million company specializing in integrated supply?
Witmer: Bruckner maintains sourcing arrangements with more than 30,000 companies for a wide range of MRO supplies. The company has innovative systems for managing multiple operations and is developing technology-based solutions to outsource the procurement distribution and management of indirect materials.
The purchase is a classic example of how a well-capitalized distributor can use an acquisition to accelerate the achievement of its strategic goals and raise the stakes for competitors to compete for the business of large industrial accounts.
EW: What qualities do acquirers seek in an acquisition candidate?
Witmer: While acquisition strategies vary from one acquirer to another, three qualities are of particular importance: the quality and breadth of a distributor's customer relationships; the quality of continuing management; and a balance sheet reflecting above-average profitability. While some notable exceptions exist, most industry acquirers believe they can efficiently create more shareholder value by improving the growth rate and profitability of well-established, successful distributors than by focusing on management-intensive turnarounds.