4TH QUARTER 2019 M&A UPDATE
This update is brought to you by Pompeo Group and its strategic partner, Tounge Associates, a leading merger and acquisition firm.
‘Consolidation’, ‘Roll-Up’, ‘Bolt-on’, ‘Tuck-In’— these are popular terms M&A Advisors use frequently these days, but they all refer to a strategy of inorganic growth. The lighting industry is in the midst of this strategy being played out daily due to industry fragmentation and a high concentration of smaller founder-driven and family owned businesses, especially in the lower middle market. These market conditions often attract larger strategic industry buyers and also Private Equity (PE) firms seeking to build value with accretive acquisitions. We know of a number of these PE firms currently active in the lighting industry and are working with many of them.
According to Pitchbook, a financial data software company, ‘add-on deals’ now account for more than two-thirds of the total deal count in the USA middle market sector across all industries.
Axial, a deal focused database, recently had an article by Meghan Daniels which explored ’The Risk and Opportunities of Inorganic Growth.’ Here are some salient (but cautionary) points taken from the Axial round table discussion event that informed the article:
- Inorganic growth through acquisitions can create value quickly
- Integrating and growing multiple acquisitions requires a lot of work, additional expense and can by risky
- Cultural fit can be critical and hard to manage
- Integration requires specific focus separate from ongoing operations
- Bolting-on a good company to an inefficient platform business will generally fail
- Timing can also be critical
- Add-ons should be within the core competency of the platform business—the further from the core, the more likely the failure
Bain and Company’s 2019 Global Private Equity report states “…buy and build [strategy] can offer a clear path to value at a time when deal multiples are at a record level.” Additionally, the report noted, many successful buy-and-build strategies by well-positioned platforms make at least four sequential add-on acquisitions of smaller companies.
Given the incredible amount of consolidation in lighting, controls, electrical and IoT today, these concepts should be well understood by both platform companies as well as those looking to be acquired.
One major question on everyone’s mind is how long will this ‘feeding frenzy’ of acquisition activity continue? As smaller companies get absorbed by larger ones, the pathway to staying vital appears to be narrowing—either you must grow through acquisition yourself or be acquired by a larger player. Smaller companies will have an increasingly harder time competing unless they have a very defensible niche. All those who remember the tech bubble bursting understand every industry has a life cycle. Lighting has gone through a metamorphosis, at least partially due to LED innovation and is poised to see additional opportunity with the IoT. This metamorphosis will no doubt continue but change is definitely in the wind. We expect the next 2–3 years to be a critical time for those planning an exit.
Interesting piece in WSJ recently. They reported that “Buyout Activity Declines Sharply” over the past 12 months. The piece goes on to say that “…U.S. private equity firms are armed with a record amount of cash [but] are struggling to find ways to spend it.” That may be true as an assessment of all industries, and we agree about PE firms having healthy levels of cash. However, we simply don’t see a “struggle” at all in terms of PE firms and acquiring companies’ interest in lighting, electrical controls, and IoT manufacturers, distributors and even independent rep agencies. In fact, the past 90 days saw a number of transactions within these segments, with the most frenetic pace being over the past two weeks (all acquisitions courtesy of EdisonReport unless otherwise noted).
First off, Winsupply moved to create a company to handle their acquisitions (Electrical Trends). The lighting blockbuster acquisition of the quarter (and the year) was Signify’ s acquisition of Cooper Lighting from Eaton (as reported in EdisonReport). Early last month Chicago-based Architectural Lighting Works (ALW) acquired V–2 Lighting, solidifying their presence as a leading provider of architectural and decorative specification-grade lighting. Leviton in November announced their purchase of Canada’s VISCOR. NSi Industries acquired SullStar Technologies in early November to expand their VDV business (Electrical Wholesaling magazine). And, just three weeks ago Acuity made the intriguing but not unsurprising purchase of LocusLabs, an indoor mapping and location platform. November was capped off with EdisonReport’s announcement of Myers Emergency Power Systems’ purchase of LVS (Low Voltage Systems), a San Leandro-based manufacturer of relays, emergency lighting inverters and emergency power controls. ER also announced that R&D Lighting Controls merged with Mulcrone and Associates, a NEMRA rep agency, effective January 1 of 2020 so M&A activity touched on manufacturing primarily but also distributors and independent rep agencies. And last (but not least) Lambent Holdings acquired LF Illumination, marking the 3rd time lighting veteran and Lifetime Achievement Award honoree Jack Zuckerman has created a lighting company that was later acquired. What will Jack’s fourth act be? Just as importantly…
Who’s next? Where is your business in this life cycle of the lighting industry? If you are an owner considering selling or have even contemplated selling—whatever your situation, our experts are available to speak confidentially with you. We are always available to have a preliminary discussion regarding either a valuation, an acquisition or an exit strategy.
If you would like to arrange an initial confidential discussion to discuss these options, please contact us as indicated below. If you’d like to learn more about our firms, please visit www.pompeo.com and www.toungeassociates.com.
Tounge Associates’ excellent source of M&A experience combined with Pompeo Group team’s nearly three decades of lighting and electrical industry recruitment experience will help firms—whether it is a manufacturer, wholesaler or design firm—to source the right buyer, the best merging partners or the most strategic acquisition targets. Both Tounge Associates and Pompeo Group understand the importance of confidentiality and base our reputations on extreme sensitivity to this matter. As a result, much of our work comes through recommendations from satisfied clients.
LIGHTOVATION, THE DALLAS INTERNATIONAL LIGHTING SHOW 2021
Jan. 07-10, 2021
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