NEXT MOVE

When more than 150 independent manufacturers' representatives from a variety of industries met in Tempe, Arizona, for an intensive five-day educational program in early January, one of the constants in their discussions was the impact of merger/consolidation activity. Whether it was the wireless communication, food service, electronics or electrical industries, the word was the same: Consolidation among reps continues at a rapid pace. Reps make the move to merge, consolidate and expand for several reasons:

• Achieve economies of scale

• Meet the ever-growing demands of manufacturers

• Follow the expanded “footprint” of customers that have grown through mergers/consolidations

Henry P. Bergson, president of the National Electrical Manufacturers Representative Association (NEMRA), Tarrytown, N.Y., says the consolidation trend with reps differs from what's happening with manufacturers and distributors, where the big have continued to gobble up the small. One reason the rep community is consolidating in a different manner is the size of the firms, he says.

Oftentimes, Bergson says a rep merger will be based on the customer contacts of a few people in the two firms. The companies might have strengths in different market niches, and together want to provide a more robust package of products and services for customers, or are looking for more clout with manufacturers. In contrast, many of the larger distributors or manufacturers active in the acquisition game want to achieve a certain critical mass so they can spread costs across a wider base and operate more efficiently.

Bergson also says rep consolidation differs from what's happening in other parts of the electrical market in that reps often don't publicize a merger until they believe it's working smoothly.

“The consolidation movement among reps is steady and constant,” says Bergson. “But some of the activity is rather subtle in nature and occurs under the radar scope. Others are major undertakings.”

He says in one scenario, product lines and/or company personnel might move from one firm to another and the individual or individuals left behind may decide to go off in another direction. In a more traditional acquisition, where one rep firm takes over another, it can create massive organizational changes.

Bergson sees two key variables driving much of the rep consolidation. He agrees more reps are expanding their areas of coverage to adequately serve the needs of those customers that have grown regionally by acquisition. But he also sees a desire to obtain additional skill sets. For instance, this may happen when a commodity-oriented rep consolidates with a “spec-oriented” firm. “In order for each to gain the skill sets of the other, consolidation is an intelligent move,” he says.

While his firm is not currently merging or consolidating, Gene Biben, Joseph E. Biben Sales Corp., Philadelphia, Pa., achieved the growth that others seek by expanding his territory from the Philadelphia area to Baltimore/Washington, D.C. According to Biben, “We made the decision at the urging of manufacturers who pledged their continued support if we made the move. We were originally in that market when the agency was founded in 1961, but we left the area 18 years ago.”

Biben says while looking to expand his operations he had received offers to acquire agencies in different territories. “What it really came down to was the fact some of our key manufacturers asked us if we would go to the Baltimore/Washington area,” he says. “However, before we made the move, we spoke with electrical distributors and contractors in the territory to ensure that there was potential.”

The fact that the Baltimore/Washington area is adjacent to Biben's existing Philadelphia territory and the efficiencies that could be realized by expansion were two other key factors. Biben says the company wasn't looking for any new lines, and just wanted to sell more of what it already represented.

“Our inside people were looking for more business, he adds. “We already had great people in-house that were efficient and were good at what they did. We were looking to exercise more expertise from our associates than ever before. This move provided those opportunities. The time was right and everything came together for us.”

Ron Haedt, Electrorep, Inc., Sausalito, Calif., points to growing demands from manufacturers and the increased expense of operating a rep firm as reasons why he opened a new location in the Los Angeles market four years ago.

“The unfortunate thing about operating a rep firm today is the demands that manufacturers put on us, such as increased inside-sales and order-entry responsibilities without increased commissions,” he says. “Because of this trend, being an independent rep has become a very expensive proposition.”

In Haedt's opinion, one of the rep's options is to grow either vertically or horizontally. “You can follow a course of staying within the traditional boundaries of your territory and growing by adding new business divisions or more lines,” he says. “Or, you can grow horizontally into a new territory. The thought process is that with the former you might grow to 25 or 30 lines. With the later, you work with a lesser number of lines, but grow business by doing a better job for your existing manufacturers in a new territory.”

One independent electrical manufacturers' rep firm that has covered diverse markets in several territories for a long time is Fox-Rowden-McBrayer, Inc., Norcross, Ga.

“Almost since the inception of our agency, we've had a broader footprint than most rep firms,” explains Ken McBrayer, principal. “We've served the power utility, industrial, commercial and residential construction markets. In recent years, we made a major move into telecommunications — both private and public networks.

“I haven't spent much time studying the issue of mergers/consolidations among rep firms and comparing it to the rate of consolidation on the manufacturing side. However, it's clear there are fewer manufacturers to represent today than ever before. Those manufacturers that remain are getting bigger and more demanding in the services they require of their reps. That means the rep must take a look at how they best can provide those services, which brings us back to the economies of scale discussion.

“For many companies, it's a matter of the rep adopting a survival mode. There's also been a lot of pressure on the economy during the last few years, accompanied by pressure on our commissions. Some people in the market are struggling to find the right avenue to follow.”

Larry Low, Synergy Electrical Sales, Inc., Fairless Hills, Pa., says many reasons exist for why an agency charts a course for growth, whether by merger, consolidation or territory expansion.

“Every move we have made has been to grow the business,” he says. “For instance, in the past we've felt that a market we serve is mature, and that while we had a good market share, the best way to really grow the business is to merge with another firm.

“Then there are the occasions as our business has evolved and we're doing some residential/commercial and light industrial work. As our manufacturers were growing through acquisitions, they were asking their rep agencies to represent more of the lines that they now owned. By continuing to grow via mergers with other rep firms, we have been able to attract major manufacturers by our ability to cover additional market segments.”

Low says growth for reps is a matter of survival. “Our goal as an agency is to be here for the long haul,” he says. “By continuing to grow our business and to serve additional markets, we'll continue to be more attractive to major manufacturers in the future. We've been able to do that and right now we have a great package for the customers we serve.”

A slightly different view of rep consolidation is offered by Joe Miller, president and CEO, Manufacturers Agents National Association (MANA), Laguna Hills, Calif. Across the industries that MANA serves, he says, “We are seeing only minor evidence of consolidation across all of our industries. This surprises me because there are obviously some economies of scale to be gained by larger size. The last couple of membership profile surveys we have completed show the average MANA agency size constant at about six employees — including the owner. Thirty percent of our 4,000-plus members are still one- or two-person agencies.”

Speaking in general terms concerning what the impact of rep agency consolidation might mean short- and long-term, Miller says, “Short-term, consolidation is a way to drive down operating costs and impress some principals. However, given the vast desire for independence, many MANA members will choose to stay small.”

He believes it's inevitable that independent manufacturers' reps will get larger for reasons of principal attainment and retention; economies of scale; and the need for more professional management.

“Most important, competition requires that the agency owner be the complete businessperson today,” says Miller. “As more owners realize this, they will opt for larger agencies. The 50 percent of agency owners who close down their businesses when they retire will begin to see the value of merging as part of their exit strategy.”