Those who cannot remember the past are condemned to repeat it. There is a significant amount of truth to that saying. Thankfully for the HVAC industry, the fact that it has a graying industry certainly helps prevent it from making that mistake.
I am speaking of the latest trend in HVAC contracting — the mergers and acquisitions of HVAC contractors. For many readers, they realize this is not a new trend, but rather a repeat.
In the 1990s, this was simply known as consolidation, and the industry still has the scars to prove it. Many companies were run into the ground, and the big bag of cash promised to the contractors never materialized. So you can imagine that some contractors were skeptical when this trend first started.
Back in the days of grunge music, it was publicly traded companies that were buying up and consolidating HVAC contractors. These days, it is private equity companies entering the HVAC market.
So is the HVAC industry doomed to repeat itself? The early results say no. As you can imagine, there was a lot of talk about this issue at the ACCA conference a few weeks back. These discussions were taking place in both the sessions and in the hallways between sessions.
But it was a different conversation than what was happening a few years ago when this private equity trend was just starting to take shape. More than a few of the ACCA contractors had completed or were in the process of completing this transaction. And those that were not had already received calls from numerous private equity firms kicking the tires.
To say the conversations were much more serious at the latest ACCA event would be an understatement.
I had an interesting conversation with a contractor at the airport getting ready to fly home. He has been part of his family HVAC business when his father sold to a utility company in the 1990s. He eventually purchased it back and is currently finalizing a sale to a private equity firm. In his words, the two transactions are like night and day.
For one, PE firms are listening to the contractors and their top management staff. In the 1990s, that was not necessarily happening, and a lot of institutional knowledge was being lost. This time around, they are expecting upper management to stay on for a negotiated length of time to make sure the issues of the 1990s do not resurface. You can tell these folks have done their research and learned from the mistakes of the past.
The contractor was also very happy with the price he was offered for his company and even more impressed that those doing the buying were keeping a more hands-off strategy.
Ted Polk from Capstone Partners remembers the old wave of consolidation, and he is confident the industry has learned its lesson.
“There was a rollup strategy in the 1990s that were employed by several companies that went public. They grabbed five companies to make a bigger company and take advantage of buying power and shared marketing,” Polk said. “It was not handled well and was a black eye on acquisitions. It was not as well thought through as private equity is doing today. They learned from what happened and are much more surgical now. They are thinking things through up front.”
There are reasons smart people in private equity have set their sights on the HVAC industry. While the HVAC contracting industry is very large, it is also very fragmented. From an investor’s perspective, the fragmentation is attractive because the demand for each business is distinct. Also, the growing awareness of energy and the strides the industry has made in energy savings also makes the industry attractive. For commercial companies, energy is their highest cost behind labor and rent.
Will this roll on forever? Of course not. What does in the financial world? But when I have spoken with financial experts and asked if this bubble will soon burst, I have repeatedly received the same answer. It is always some variation that the industry is in the middle innings of the mergers and acquisitions activity cycles and there is still a nice future in front of it.
HVAC contractors should enjoy the ride.