As mergers and acquisitions activity in the electrical segment continues to heat up, here’s what distributors need to know about how to manage the changes and what’s coming around the next corner in 2020.
The “urge to merge” has taken hold of the industrial sector in 2019, and it’s pulling the electrical distribution industry in right along with it. Whether its larger companies acquiring smaller firms in an effort to broaden their footprints in the marketplace; equals pairing up in order to gain economies of scale; or large distributors taking themselves private, the moves being made are notable and the momentum strong.
October was a particularly active month for mergers and acquisitions (M&A) activity. Dutch-based lighting company Signify (formerly Philips) announced that it would acquire Cooper Lighting Solutions from Eaton for $1.4 billion. Two weeks later, Anixter International, Inc., announced that it was being acquired by an affiliate of Clayton, Dubilier & Rice for $3.8 billion—a move that will make Anixter a private company.
Rewind the clock back several months and a handful of industry players were obviously getting their own ducks in a row for potential M&A activity. In April, for example, Sonepar USA named Kris Prebola VP of mergers and acquisitions—a move that Lawson Products would take by creating a similar position for Brian Hoekstra just a few months later.
The trend continued when Winsupply Inc., launched the Winsupply Acquisitions Group in October. The company says the new entity will focus on broadening “the reach of its long-held philosophy of providing hardworking entrepreneurs the opportunity for business ownership.”
As M&A continues to heat up, certain corners of the electrical space are particularly ripe for such activity. Matt McCarron, VP of industrial/commercial sales for LEDVANCE, sees the lighting segment as one such target area.
“The lighting business today is tough; we’re seeing a lot of contraction in it,” says McCarron, pointing to the Signify-Cooper deal as a sign of potentially more activity to come over the next 12 months. “I think some of the smaller firms are running low on cash—both distributors and manufacturers—which effectively creates an environment for more of these types of deals.”
Joe Wagner, managing director at PMCF, an investment bank providing merger and acquisition services to companies throughout the Americas, Europe, and Asia, says deals like Eaton’s sale of Cooper indicate strong market dynamics and a push to realign corporate portfolios with broader corporate strategies. If, for example, a conglomerate has multiple business lines or divisions in place—and if some of those lines are deemed “non-core” to the firm’s broader strategy—then the current market continues to support attractive valuations to monetize those businesses.
Put simply, companies are moving away from non-core activities and focusing on what they do best. “The market wasn’t surprised by the Cooper deal,” says Wagner, “because Eaton has publicly stated its intention to exit the lighting business and focus on core sectors.” That trend could soon extend out to the broader electrical segment, where a strong market is allowing larger players to focus on their core markets.
Year Over Year
Comparing 2018’s and 2019’s M&A landscape, Wagner characterizes the latter as “quite active.” According to PMCF’s deals database, activity during 2019 surpassed that of the prior year in terms of the number of announced deals.
“2018 was a down year relative to 2017, but still fairly strong,” says Wagner. “2019 is on pace to have an increase in deal volume over 2018.” With another year of positive economic growth, we see companies using acquisitions to become more recession-resistant, based on what some experts believe will be a potential macro-economic dip in the next couple of years.” While some analysts and economists are starting to talk about a possible downturn in 2020, Wagner says he believes that’s several years out.
Digging deeper into the drivers of 2019’s higher deal volumes, Wagner says companies are looking for both product and geographic expansion to diversify their businesses ahead of the next correction. “Companies’ balance sheets continue to be strong, so they have the ability to finance these transactions,” he points out, noting that there’s also capital available on the private equity side, which typically factors into the M&A picture.
When Two Become One
Depending on their positions in the market, the agreements that they have in place with their suppliers, and their own M&A plans, electrical distributors could be impacted positively or negatively by industry consolidation. For example, when two companies become one via a merger or acquisition, there’s always the potential for line card/product line overlap and potential conflicts.
“Making sure that a transaction doesn’t create conflict with vendor contracts—whether it’s across territories or across competing lines,” says Wagner, “is obviously part of the due diligence process.” Knowing that one of the key drivers behind industrial M&A is to strengthen line cards and expand geographically, he sees well-versed and active M&A acquirers keeping a watchful eye open for these types of pitfalls early in their due diligence processes.
Knowing that deals set to close next year are probably already in process (but not yet officially announced), Wagner doesn’t expect the presidential election to have much impact on M&A activity for the first half of 2020. “While a lot of these deals are surprises to the industry when publicly announced, the reality is that both sides have been working towards a deal for many months,” Wagner says. “Deals in process now are moving forward with current knowledge of next year’s election.”
To distributors that are thinking about putting themselves on the block in 2020, Wagner says there are some foundational steps to take before launching a process. For starters, make sure your management team is properly incentivized to see a deal over the finish line. Have a growth forecast and strategic plan that’s backed by supportable action items—ideally with traction demonstrated—and supplier and customer contracts that are buttoned up tight.
“The ability to show growth is a big driver of value,” says Wagner. “These are the kinds of things that buyers look at, and that they’re willing to pay a premium for.”
Tagged with acquisition, m&a, mergers and acquisitions