If consolidation hasn't hit your market yet, you may not have long to wait.
Although the electrical industry still has a long way to go to get to the point where four behemoth electrical supply houses control the market, it has seen many well-known firms acquired or merged into others.
This drive-to-combine mentality pervades all distribution trades. A recent NAW (National Association of Wholesaler-Distributors) report describes the situation in this way: "Wholesale distribution has been subject to waves of consolidation that have dramatically changed the faces of some of the lines of trade."
Numerous factors have combined to make consolidation hot right now. Certainly one of them is the availability of Wall Street money to finance this growth. Then there's the popular business philosophy that centers on the increased efficiency and lowering of costs possible across larger volumes of business, and, the succession issues of small businesses as few survive into the third generation.
Most distributors will, if they have not already, find consolidation touching them in one way or another. Maybe a competitor down the street-or maybe even your own company-will join a larger company. Any distributor looking to the future must examine succession possibilities, growth strategies, technology investment and financing options. As part of that, they must weigh the pros and cons of going it on their own or looking for a larger entity with deeper pockets.
Because you need to go into the fray aware, EW invited the top executives of some of the distributors most actively involved in the acquisition chase to a roundtable discussion (page 30). Our invitation attracted companies with similar mindsets. All involved preferred to work with thriving, on-going businesses with a strong management team. All agreed that they look for companies with plans for the future that might benefit from the financial resources these larger entities command.
Other known acquirers who were also invited to the roundtable, but declined, could have added other viewpoints. I shouldn't have to remind you that consolidation in theory is one thing, while consolidation in practice can be quite another. With that in mind, these intriguing opinions emerged from the roundtable:
The pace of consolidation in electrical distribution is comparatively slow. Consolidation in this industry is meeting with more resistance than in other distribution trades. All participants noted that acquisition activity had slowed in the last year or two.
The major forces driving consolidation come from within this channel, but mirror forces affecting other distributor trades. At the moment, there are no roll-up wheeler dealers trying to create an overnight powerhouse. The participants saw succession issues, the economic cycle, information technology, scale, capital requirements, customer demands, manufacturer demands, alternative channels and barriers to entry as the principal drivers.
The factors that acquirers use to judge a firm's attractiveness reflect the issues all businesses should evaluate. The participants analyze these factors the most: investment in information technology, facilities, training and marketing programs. They also factor in absolute size; diversity (geographic, product, customer); growth rate; sophistication, compatibility and continued participation of management; growth strategy; strategic fit; customer base compatibility; software system compatibility and Y2K compliance.
Distributors may meet up with one or more of these acquirers-as competitor, as ally, as savior, as nemesis. You should get to know what they're thinking, in this issue and, if you missed it, our January issue