Acquisitions Start Second Half with a Bang

The first half of the year came to an end with a “bang”.  While the channel was challenged throughout the first half with:

• COVID concerns evolving to an economic recovery
• Companies redefining their work environment … again … with the economy reopening and people coming back to the office … or deciding to work-from-home
• Customer access being “variable”. Some are in the office and open, others have people still working from home and some “enjoyed” not having salespeople call on them and are more “disciplined” with their time.
• Supply chain disruption defined as “where’s the product?”
• Continuous price increases
• Loss in productivity due to dealing with the above two issues for many customers
• Searching for employees, let alone qualified employees

There was another phenom that occurred this month … a restart to the acquisition market.

The end of the month found:

• Rockwell-inspired acquisitions and investments
  • McNaughton-McKay, through its Reynolds Electric division, acquiring Mid-Coast Electric
  • French Gerleman and IAC Supply Company merging to form Agilinx Solutions
  • Rockwell spending $2.2 billion to by a software company!
• Eaton acquired 50% ownership of a Chinese busway manufacturer   .
• Dakota Supply Group expanding into Michigan and purchasing a seven location HVAC distributor
• Casey Electric Sales, a Chicago-based manufacturer representative, acquired Martin Electrical Sales. Casey now covers eight states.

And there have been some small lighting manufacturer deals.

Some thoughts:

Distributors

Rockwell distributors – The Rockwell distributor sales / acquisitions were not a surprise in the sense that most understand that Rockwell desires fewer, albeit larger, distributors who can appropriately invest in the business to support long-term mutual goals which includes specialists and software investments. Last year there were some deals relating “orphan” APRs (area of primary responsibility) and it was theorized that the magic number was that a distributor should be a minimum of $250 million.

The French Gerleman / IAC merger emphasizes the $250 million (and maybe that is coincidental.) These contiguous distributors had much in common from a culture viewpoint – very family-oriented (and the families wanted to remain in the business for legacy reasons.)

The Mid-Coast deal was inevitable given the make-up of the Rockwell landscape in Texas. There really weren’t suitable strategic acquirers that would make sense from a contiguous viewpoint and Mid-Coast did not represent a “platform” opportunity for Sonepar and, for CED, would have been a “lone” automation profit center.

According to sources, at least one of these deals has been in the works for “awhile” and perhaps coincided with the most recent introduction of the latest Rockwell authorization plan. Whether said or inferred, distributors essentially understand “go big or go home.” There were some small deals last summer. Expect 3-5 more by the end of the year.

Dakota Supply Group – The Dakota expansion into Michigan is interesting. Dakota is a well-diversified company with growth ambitions. The company has invested in technology, infrastructure, and people (recently hiring Chris Buelow as VP Sales and Marketing) and made a small acquisition last year. It wouldn’t be a surprise to see Dakota use their Michigan footprint to take advantage of opportunities in the market and further diversify, which could enable it to invest into an RDC to fuel further expansion. The company does have a penchant for “smaller” markets (with Minneapolis being its largest.)

Manufacturers

 Rockwell and Eaton seem to have different visions.

• Eaton – Eaton’s investment in Jiangsu YiNeng Electric’s busway business appears to be a nominal investment into either a product offering to support its Asian business and/or a combination of support for its Asian business and possibly a sourcing resource. In 2020 the company’s revenue was $60 million, hence a “nominal” investment.
• Rockwell – Rockwell, on the other hand, appears to have a different vision.  The company
  • Spent $2.22 billion to purchase Plex Systems.  According to Plex’s website, Plex is “the leading pure software-as-a-service, cloud-native smart manufacturing platform operating at scale.  The company provides leading applications in manufacturing execution, supply chain visibility, and quality management across discrete, hybrid, and process industry segment. Key company segments are automotive, food and beverage, high-tech and electronics, industrial manufacturing, plastics and rubber and precision metal forming.
  • The company currently has 41 “partners” which appear to be software / consulting firms. It will be interesting to see how Rockwell’s distributors will be able to participate.
  • Earlier in the year Rockwell finalized the acquisition of Fiix, an AI-enabled computerized maintenance management system that manufacturers use to schedule, organize and track maintenance.
  • The company also made a $40 million investment in Infinitum Electric, a company that plans to make electric motors without copper.
  • Invested in Claroty, an industrial cybersecurity company. Claroty has several private equity firms as investors along with Siemens and Schneider.

Rockwell’s investments in software create interesting opportunities, and challenges, for distributors. There are many “learning / training” needs to identify opportunities to either provide leads (and benefit financially) or sell / monitor software. At the same time, it is a different type of “sale” let alone is sold to a different type of buyer.

Reps

The Casey acquisition of Martin highlights the continued consolidation of reps for succession reasons as well as lines seeking to expand or consolidate the number of reps that they interact with. Both Casey and Martin are strong Hoffman reps and there could be other synergies.

We are also aware of other reps that are seeking to expand their territory, enabling them to leverage their infrastructure, systems and personnel. And in some cases, manufacturers are encouraging them, indicating that manufacturers are seeking to either reduce the number of reps they interact with and/or are seeking representative changes but don’t see viable alternatives in a market (CMG recently evaluated a couple of markets for a client and found that the selection was “limited” after identifying those who already had a competitive line.)

2^nd Half

So, the second half starts with the deck being shuffled. The supply chain disruptions and price increases will continue. Business will continue to be strong given the recovery. Opportunities abound. We expect an accelerated M&A market as distributors seek to capitalize upon a strong market that is intersecting with generational issues, technology investments and staffing challenges. 2020 was a better-than-expected year, sales and profit-wise, for many distributors. 2021 is a banner year. The outlook can only be for slower growth rates, so … the time is right.

And the market is also providing for diversification opportunities.

Now is the time to “double down” on research and ideation to enable planning for 2022 (yes, it will be here before you know it!) so that you can finish 2021 with a bang and start 2022 with its own bang!

What is your crystal ball saying about the second half of the year?