Acquisitions Heating Up

We’re starting to see, and hear, rumblings in the M&A market. Many have wondered when this would start in the distribution industries. With credit tight, it has been a challenge. And banks loath the word “construction” (must be that they see their home foreclosures and pending commercial loan problems). But the reality is that there are a number of companies that are healthy and have good cash flows.



And there are companies that are

• Looking to prune themselves, or
• Expand, either into new geographic markets or market segments.

Witness a couple of recent acquisitions in the electrical industry:

• PEPCO acquired the Columbus branch of Johnson Electric (Cincinnati). Consider why one company decides to prune a location that is a couple of hours away and another enters a new market. Could it be financial strength? Change in direction? Taking advantage of opportunities to expand geographically?
• The part of Standard Electric (WI), Vision Control & Automation, acquired an industrially oriented branch of Richards Electric in Indianapolis. Indianapolis is a distance from Milwaukee. Again, why? Change in business focus from the seller? New markets for the acquirer?
• Grainger is becoming more involved in the electrical industry with their acquisition of Alliance Energy Solutions, a service company that provides turn-key energy-efficient lighting retrofits (an ESCO). According to the president of Grainger U.S., “Our customers told us they had a need for a service to complement our deep product line around lighting products”. Sounds like they’re expanding their offerings to their customers to meet unmet needs. And with energy retrofits expected to be one of the few growth markets for the next couple of years, Grainger appears to be positioning itself to serve a market that they believe is profitable (look at Grainger’s annual report if you think they believe in distributor margins). They must feel that not enough distributors are creating demand in this market.

Additionally

• At the recent NAED Eastern we were approached by 3 manufacturers and a couple of distributors who are looking for acquisitions, and have arranged financing (which has now put us somewhat into the M&A market).
• We’re also hearing from distribution clients that they have been approached by companies seeking to be acquired (albeit many are small companies that may either have financial challenges or are looking for industry exit strategies (i.e. no business succession).

Do you see the acquisition market heating up? How many distributors, or individual branch, do you think will be acquired in 2010?