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Consolidating doesn't ensure success, survival

July 1, 2000
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OK, it’s last New Year’s Day, and you’re running a consolidated service business. You have rolled up several-thousand companies, giving you 4,000 outlets, a 10% market share, and sales edging up to the $3 billion mark. Your stock price is in the $40 range.

You’re looking to sustain a strong market demand that grows nearly vertically, with a great renewal rate and handsome gross profits. Your technicians aren’t just walk-ins from the street, but trained and certified professionals. You’ve got the bucks to outspend your competitors in advertising and other promotions.

Better still, your industry is age-sensitive and driven by demographics. You look back fondly to January 1, 1996, a day on which the first Baby-Boomer hit 50. That turning point augurs an oncoming flood of nearly 80 million new customers. Your company is a testament to the “urge-to-merge” culture that has fueled so much of the consolidation activity.

But lately, the wheels started coming off. Wall Street has been unkind. Three months into the year your stock has dropped to $20 a share, where it has stayed ever since.

Worse yet, you’re getting hit with a barrage of high-profile lawsuits. Texas is suing you for letting trainees do some jobs, a definite no-no in this business. New York is investigating you for anti-trust violations. There’s even a lawsuit involving a local TV news anchor in Wichita Falls, Texas.

In another lawsuit, you defend yourself against charges that one of your outlets suffers from odors and fluid seepage by claiming that “A mouse had probably crawled into the ventilation system and died.”

Last spring, your stock fell 44% in a single day. You face an investor lawsuit charging that you misled them, so you ask your president to resign, which he does.

Brave new world

Welcome to the world of Service Corporation International, the largest funeral company in the world, and a force for more than 20 years when it became one of the first consolidators of anything.

It gets big-buy discounts on everything from hearses and caskets to embalming fluid and funerary urns. The average funeral home buys 60 caskets a year; Service Corporation’s buys are measured in six digits.

Even the demographics betrayed the big corporation. According to the iron laws of mortality, the Baby Boomers should have started checking out in big numbers. But there has been a 2% decline in the death rate, thanks to medical advances. People who should have been counted on to die from AIDS, homicide, heart attacks, and suicide stubbornly refuse to do so.

Service Corporation isn’t the only consolidated behemoth in trouble. Waste Management Inc., the big trash hauler, is reeling from poor earnings, an accounting scandal, and a $19 billion merger with Service USA that didn’t happen. And, of course, the company is being pummeled by investor lawsuits.

Size not a guarantee

“We need to switch cultures from the deal-driven, roll-up culture,” said Ralph V. Whitworth, Waste Management’s acting chairman. He reminds us that companies whose sales are measured in the billions of dollars can go bust just like the mom-and-pop variety.

The hvac industry can learn from the afflictions being visited upon the big undertaker and the big trash collector. Size doesn’t guarantee success; big sales volume doesn’t guarantee survival.

Whitworth’s words have an eerie relevance to American Residential Services: “We have some problems with the integration of the two companies,” he said, pointing to problems with inconsistent pricing policies, accounting, the quality of the information systems, and employee morale.

We are now entering the fourth year of consolidation in the hvacr sector. The roll-ups of more than 300 hvac contractors have changed the psychology of owners in this business. For the first time, contractors have found a market for their businesses, and unquestionably the buyers have enhanced the value of the sellers’ businesses.

Before consolidation, the contractor who wanted to exit the business had few options. He could sell to an ESOP, sell out to his partner, or throw himself on the mercy of the open market — not an attractive choice.

The past 12 months have been a bumpy ride for the consolidators. Stock prices have eroded from earlier highs. American Residential Services ($600 million annualized sales) has been folded into ServiceMaster to live again as a unit of Rescue Rooter. Service Experts ($700 million), citing costs associated with integrating three of its service centers, is said to be looking for a buyer.

Only the two biggies — GroupMAC and Comfort Systems, both at $1.3 billion-plus — seem to have weathered the storm. The question now is, will they be taken over by one of the gargantuan utilities?

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