Consolidation at the Crossroads
It’s been quiet lately. There has barely been a ripple on the pond of hvacr consolidation. While an occasional headline-stealing story has raised an eyebrow or two, the hvacr industry hasn’t heard too much from consolidators.
And if the current trend continues, the hvacr industry won’t hear very much more.
It’s true that the industry has been gripped with news stories about some major players: the demise of American Residential Services (now ARS/Rescue Rooter); the merger of two similar entities, vanquishing GroupMac to the black hole of former businesses, only to see its re-emergence as part of Encompass Services Corp; and the surprising partnership of a former consolidator and a manufacturing giant (Lennox/Service Experts).
But did each one of these newsworthy events reflect the early buying frenzy of Wall Street consolidators who acquired, acquired, and acquired some more? No. In fact, the very essence of consolidation — addition through numbers — was barely affected at all.
That’s because consolidation of residential and commercial/industrial hvacr contractors has finally hit a wall. A bold statement? No. A criticism of the consolidation movement? Hardly. It is simply the passing of one business phase into another.
As Bill Murdy, ceo of ComfortSystems USA — the only original consolidator whose model has remained intact — put it, “All companies [consolidators] were designed to become an operating company, not a consolidator.”
WINDOW OF OPPORTUNITY ClosesMost of the former consolidators interviewed by The News agree with Murdy’s assessment. They believe that consolidation was the means to acquire a company to increase growth, and, at some point, the acquisition of companies would inevitably slow down to a crawl or cease.
Expansion by acquisition is no longer the catch phrase. It has become expansion through internal growth.
With the acquisitions slowing down and with a refocusing on strengthening from within, there appear to be fewer opportunities for contractors looking for an exit strategy to find an interested buyer for their businesses.
As Murdy puts it, “For those who waited, they missed the window of opportunity.”
There will still be opportunities to sell today, but the buyers will be choosier. Mistakes from the past will not rear their ugly heads again, if corporate leaders have their way. There are still markets to conquer and ships to right, but the emphasis now will be on the latter — making good products and services evenbetter.
Simply stated: consolidators have become operating companies.
Current Figures From Major PlayersThe face of the consolidation business has featured four names familiar to the hvacr industry. These are:
A fifth, Blue Dot Services (see status report, page 14), is also included on this list, based on its size and its similarities to the other four. Blue Dot, unlike the others, is not a publicly traded company. (ARS/Rescue Rooter is not publicly traded, although its parent company, ServiceMaster, is.)
There are others that could be included, such as Emcor and R.S. Andrews, to mention two. However, in order to compare where the consolidation industry was to where it is now, let’s continue to compare apples to apples.
The totals from the five companies:
If you are a fan of percentages, try these on for size: With an estimated number of 30,000 hvacr contractors in the U.S., these five companies combine for around 1.5% of the total number. However, their revenues take up a bigger chunk of the total pie. With an estimated construction value of $55 billion, the companies generate 8.5% of total revenues.
That equates to each “consolidated” contractor averaging $9.6 million in sales and “everybody else” averaging $587,000.
Watch THOSE utilitiesDoes that mean that all the high-volume hvacr contractors have been acquired by the Big Five? No. There are countless numbers of multi-million dollar contractors who have elected to remain independent of consolidators — some of whom have resisted the urge to sell and others who have been acquired by utility companies.
Consolidators have not drained the talent pool of hvacr field personnel; rather, they have been bitten by the same bug affecting all of the trade — a lack of qualified help.
Encompass’ ceo Joe Ivey said his company is not immune to recruiting and training problems, but he added that the industry needs to do a better job of promoting itself.
“There aren’t too many industries in America where a person can start at the most basic level and end up owning the store,” he said. “Bank tellers rarely own the bank and auto mechanics rarely own the dealership.”
Another key issue, utility competition, has a larger effect on residential companies, such as ARS/Rescue Rooter and Lennox/Service Experts. Although some contractors have taken the position of “if you can’t beat ’em, join ’em,” one executive thinks utilities need hvacr contractors to further their own market strategy.
“We are watching the utilities,” said ARS/Rescue Rooter president Bill LeBaron. “For them to perpetuate, they have to have a good service company run that side of the business. And that is where they have struggled.”
Big SPLASH HAS YET TO COMEIf all consolidators had their way, they would probably prefer to blend into the hvacr sales and service landscape. Their transition to operating companies has not made a big splash — and that suits them just fine.
These large corporations do want to make a splash on another front: delivering an efficient and cohesive image to their thousands of customers. The drive for internal growth is also a drive to improve the image of the hvacr industry and the quality and service that reflects that image.
“We will ultimately raise industry standards through the service we provide,” said Lennox/Service Experts’ Jim Mishler. “When you go to market and ask contractors who their biggest problem is, it is not us [consolidators].
“We do everything by the book. It is the people who install equipment on the side and work two days a week while not investing in their business who are the problem.”
These operating companies are armed and ready to raise hvacr industry standards. If and when they acquire existing businesses or start up new ones, their new goals remain clear: strengthen from within and acquire businesses only when it makes for good revenue growth.
Publication date: 09/11/2000