Is M&A peaking?
As I document in Chapter Five of my new, “Facing the Forces of Change®: Lead the Way in the Supply Chain,” announced acquisitions have more than quadrupled in the past two years for wholesaler-distributors in construction, and industrial and commercial markets.
In light of these trends, wholesale distribution executives should have a strategic plan for their business that recognizes the reality of acquisition activity, yet maintains a focus on profitable growth.
Are we peaking?
Wholesale distribution remains one of the top targets for buyout investments by private equity firms. These financial buyers are displaying a far greater ability and willingness to pay premium prices for leading distribution companies. They are being attracted by the ongoing need for wholesale distribution to end markets insulated from global competition, such as facilities maintenance, construction, or health care services.
The recent sales of HD Supply to a trio of private equity firms (Bain Capital, Carlyle Group, and Clayton, Dubilier, & Rice) shows the strong appetite for wholesale distribution. All three firms have made multiple investments in wholesale distribution over the years.
However, the MDM panelists believe that this activity may have reached a peak. Brent Grover, a fellow Fellow of the NAW Institute, made some pointed comments about the market, stating: “I think there are some pretty unattractive companies that have been dressed up and the market figures out pretty quickly that it’s not the kind of firm they want to buy.”
Jim Miller of Vetus Partners, who I consider to be today’s leading expert on M&A in wholesale distribution, sees the market “…at or near a plateau.” Strong words from a major player. (Full disclosure: I am on the Advisory Board of Jim’s new venture called Supply Chain Equity Partners.)
Planning your future
The courage to face the future honestly often leads owners to look for a profitable exit strategy or even favorable terms for a recapitalization. However, acquisition dynamics should play a role in the decision, because industries do not consolidate forever, as evidenced by the sharp slowdown in acquisition activity after the peak in 2000.
Well-run, independent distributors continue to thrive even in consolidating industries due to their great skill in maintaining high levels of customer service and generating customer loyalty. One distributor summed it up in a comment that I include on page 94 of “Lead the Way in the Supply Chain:
“I think [consolidation] will increase the value of the independent distributor related to servicing the customer and providing value to the vendor. The progressive independent will have a distinct service advantage. We will be more nimble and more reactive to local market conditional changes. It will raise the bar on the independent, however.”
Posted by Adam J. Fein June 19, 2007, on the Pembroke Consulting Web site â€” www.pembrokeconsulting.com