New cabling-installation market brings heightened competition

Lately, owners of specialty voice and data cabling-installation firms have noticed an undeniable change in their marketplace: Where there was once a multitude of smaller, entrepreneurial companies all competing on the same playing field

Aug 1st, 2000
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David Braun, Virtual Strategies Inc.

A merged company increases its competitive edge for winning larger national accounts.

Lately, owners of specialty voice and data cabling-installation firms have noticed an undeniable change in their marketplace: Where there was once a multitude of smaller, entrepreneurial companies all competing on the same playing field, there is now a methodical movement to consolidate the industry. This emerging business model, currently led by industry giants like Black Box Corp. (Lawrence, PA) and Houston-based Encompass Services Corp. (formerly Group MAC), is bringing to the market a heightened level of competition never before seen in this industry. Business owners are becoming increasingly aware of the need to respond proactively to the change to continue competing successfully in the market.

We use "consolidation" as a general term that comprises various business combinations like mergers, acquisitions, and rollups. Whatever the structure, the goal of a consolidation is always the same: to create a combined entity whose value is greater than the sum of the original, individual firms. Basically, bigger is better. We sometimes refer to this idea as "creating synergy. Although the word "synergy" may seem abstract, the concept can ultimately be distilled into two simple ideas: increasing revenues and decreasing costs. In our experience, consolidation is the quickest way to get there.

Consolidation is relatively straightforward to predict in most industries. Two key characteristics of today's cabling-installation market have suggested imminent change. Those characteristics are the market's highly fragmented structure and the fact that currently there is no dominant national player. In addition, customers are increasingly demanding providers that can serve multiple geographic locations, and suppliers continue to wield enormous financial clout. All these factors are evidence of changing needs in this thriving industry, and sophisticated market players are realizing the benefits of combining their businesses.

In January, I spoke at the BICSI (Tampa, FL) Winter Conference in Orlando, FL. During the week of the conference, I had a chance to talk with owners who were battling many issues in common, including constant cash flow pressure and problems making payroll; hiring, training, and retaining quality workers; increasing insurance costs; varying materials costs; and changing supplier alliances. A merger affords both (or all) parties access to a larger pool of working capital, greater purchasing power, a categorical reduction of overhead expenses, and reduction in administrative headaches. Another benefit is that with a combined labor pool, a merged company increases its competitive edge for bidding on and winning larger national contracts.

There are three major players consolidating the market right now, and chances are your peers, or maybe even you, have been or soon will be approached about selling.

Encompass Services, formed by the merger of Group MAC and Building One Services, is a publicly held $3.6-billion New York Stock Exchange company based in Houston. The company has primarily made acquisitions in the electrical and heating, ventilation, and air-conditioning (HVAC) arena, but more recently has entered the specialty voice- and data-installation industry. The company's stock has fared poorly recently, and some cabling installers are wary of being bought by a company that has only recently begun to acquire cabling-industry expertise.

Black Box, which posted more than $300 million in revenues in 1999, is essentially a catalog company that manufactures and distributes cabling equipment. Based in Pittsburgh, PA, the company has made more than 27 acquisitions since January 1998.

And Drawbridge Network Services is a recently formed partnership led by current owners of cabling-installation companies who also have experience in business consolidations. Drawbridge implements a decentralized management approach, by which owners/partners continue to run their own businesses. While the company does not have the revenue base of other consolidators, it is a private entity seeking other cabling-installation partners and hopes to build the critical mass required to go public.

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David M. Braun is president of Virtual Strategies Inc. (Washington, DC), a merger-and-acquisition firm. If you would like information on contacting any of the consolidators mentioned in this article, or information on consolidation in the cabling industry, call him at (202) 293-1420 or e-mail: info@virtual-strategies.com.

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