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Consolidation Is Back

May 1, 2006
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The mid-1990s brought a tidal wave of excitement to the industry with big names such as Service Experts, GroupMac, American Residential Services (ARS), and a Johnny-come-lately or two. The big names paid amazing multiples of earnings for primo contracting companies, and the world of HVAC was on its way to blissful consolidation and some well-deserved exit strategies for a few contractors. A look back has taught us that all was not blissful.

That's not to say that all was bad. The grand roll-up of HVACR contracting companies perhaps did not meet the grandiose expectations of some who suggested that nationally branded contracting companies would become backyard, over-the-fence chatter. And, some contracting companies died an ignominious death in the process. However, most still operate today, albeit some under very revised circumstances.

Just as the proverbial Phoenix rose from the ashes, is it possible that consolidation is about to soar once more?

OR, DID IT NEVER LEAVE?

Since the heyday of consolidation, there have been many changes: Service Experts was purchased by Lennox International Inc., and the entity represents a huge part of that company's earnings; GroupMac became Encompass, and then was gone; and ARS became ARS Service Express®, a ServiceMaster brand. (Other ServiceMaster brands include: Terminix®, TruGreen ChemLawn®, Merry Maids®, and American Home Shield®.)

There are those that say consolidation was a failure. They say that there were only a few thousand targeted contracting businesses in the first place, and those were difficult to place into cookie-cutter molds. Some contractors even bought back their old companies for pennies on the dollar of the original selling price.

Failure? Perhaps not.

Maybe it is simply evolution.

Consolidation can assume various forms. When one thinks of the consolidation boom, does EMCOR Group Inc. ever cross your mind? It is a Fortune 500® company with over $4.7 billion in annual revenues, in mechanical and electrical construction, energy infrastructure, and facilities services.

Most people don't think of EMCOR, the largest mechanical contracting company in the United States as being a consolidator of the genre from the mid-1990s. Some don't even think of it as a contracting company at all. In some circles, it is talked about as though it were a manufacturer that competes for service and installation. It's not. However, it is similarly revered or despised as one of the giants.

There are many small contracting business owners who have quietly gobbled up other local contractors who were ready to get out of the industry. This is often referred to as middle-market consolidation. Such local negotiations between HVAC contractors are going on daily in every city in the country.

Though some will still argue that the consolidation movement is over and done with, it actually appears to have morphed into whatever shape is most needed to adequately serve customers. In both big and small sectors, there have been successes in serving a broader range of customers by acquiring businesses that have desirable skill sets that can be added to the portfolio of offerings.

EVOLVING INDUSTRY

Consolidation has simply been one stage in the evolution of the industry and we are currently seeing other examples of its influence.

The Home Depot®, the world's largest home improvement retailer, announced in January 2006 its intent to acquire Hughes Supply Inc. The addition of Hughes Supply more than doubled (approximately 500 locations) the size of The Home Depot Supply, a business-to-business division that serves homebuilders and professional contractors, among other groups. The goal is to repeat in the professional arena what they were able to execute in the do-it-yourself market - market transformation. To state the obvious: there aren't as many hardware stores on the street corner. HVAC distribution must take a close look at its practices as it prepares to combat consolidation.

Johnson Controls, Carrier Corp., Honeywell, and others have made strategic acquisitions in the last 24 months.

Successful franchise operations in the HVAC industry have found that providing a consistent infrastructure, that all follow as if it were the Betty Crocker Recipe Book, yields tremendous results for franchisees. It was said of consolidation that its cookie-cutter mentality wouldn't work. Franchise programs often prosper; however, and it may only be a short time before consolidation takes the cue.

A NEW CONSOLIDATOR IN THE AIR

While attending a recent industry conference, I ran into an old friend who informed me that he had started a new company that would be buying small- to medium-sized HVAC companies. When I looked at the business card I held in my hand, I asked, "A consolidator?" "No," he replied, "A management company."

So, the evolution continues. EMCOR does not consider itself to be a consolidator; it is truly a mammoth operating company. The small company that services my comfort system, and has acquired several smaller contracting businesses, does not consider itself to be a consolidator; it is an award-winning HVAC service provider.

Call it what you will, the Phoenix is indeed rising. The practice of acquiring businesses in this industry is not dead. It has simply evolved with an ability to assume different sizes and shapes.

Mike Murphy, Editor-In-Chief, 248-244-6446, 248-244-2905 (fax), mikemurphy@achrnews.com

Publication date: 05/01/2006

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