Why Little Consolidation During “Great Recession”?

Over the past 1 1/2 to 2 years we’ve had a number of electrical manufacturers and distributors ask us why we think that there have hasn’t been much consolidation during the “great recession” that supposedly we have come out of.  We’ve had theories, but some recent input gave us impetus to revisit the issue.

Recently we’ve spoken to a few people who are in the acquisition market.  They are talking to electrical distributors, lighting distributors, plumbing companies, construction supply houses and a couple of similar trades (notice a trend).

In most of these instances, the companies are focused on the resi or new construction markets. Sales for many of the potential acquisitions have fallen significantly … in some cases up to 60%!

You would think that these distributors would be interested in selling, as well as “exhausted” from the past couple of years.

But in every case they are holding out for more money, believing that the market has hit the bottom and their business will only increase, thereby enabling them to realize a higher return.  In other words, they see a pinprick of light at the end of the tunnel … but don’t know why.

In each instance ownership is in their mid 60’s (or later) and essentially have no family, for succession, in the business.  And they admit to bank loans and that they have excess / obsolete inventory.  They are hoping for a savior, while continuing to invest in their business.

Other reasons for why there hasn’t been distributor consolidation include:

• Acquirers don’t have an appetite to buy someone else’s problems. And once the owner, or key employees leave, what is the value of a business that had inventory problems and wasn’t run well?
• A number of small to mid-sized distributor owners have reinvested back into their business, using personal funds, to keep the business alive … either for cash flow, credit, employee loyalty issues or perhaps “wishing upon a star for better times” (or a gullible acquirer).
• Some think they can weather the storm (but didn’t think it would last this long, or worse, may last longer for some markets)
• An owner’s emotional ties to the business as well as psychological reasons (don’t want to admit that the business had to close / what to do with “free” time)
• No succession plan (for the business, or for oneself)
• Few acquirers, and even some of them don’t need more locations in certain areas

While the NBER has said the recession ended June 2009 and reports from the recent Fed meeting were that the Fed felt the economy was “uncertain”; consolidation, and distributor closings, may not occur as many expected.

Many of these distributors are contributing to a decline in industry margin and this “excess industry capacity” will continue until banks close credit lines as many of these companies, unless there is a quick industry rebound (doubtful), continue to bleed.  (And if they were “good” companies / strategic fits, wouldn’t they have been bought at some point in time?)

Have you been surprised by the lack of industry consolidation? Do you think it will continue or that companies will either linger or close? Do you think consolidation will accelerate as the economy continues to limp along (or will acquisitions be for diversification purposes?)