“What are the next 10 industries to be rolled up or consolidated?”
Answer:
I love researching topics like this, but I must begin by saying that
I’m providing you with 10 industries RIPE FOR CONSOLIDATION. I cannot,
nor can anyone, guarantee which industries are next in line. However,
all of the industries discussed below share two common features
prevalent in industries that consolidate:
1) High fragmentation – The industry is comprised of many different
small producers or suppliers.
2) Buyers available – The industry contains one or more financially
strong, large companies that can gain economic benefits from buying
smaller companies in that industry.
Here are the industries, in no particular order:
1) Computer-networking services
A company called Black Box really pioneered this strategy. The company
bought up small, local networking-services companies all over the
world. Black Box already offered a catalog of networking products. The
company, and the stock, performed pretty well until the bottom fell
out of tech. But Black Box’s success will not go unnoticed.
Expect other networkers, or computer-services companies in general, to
scoop up small, privately owned networking firms while prices remain
low. Black Box isn’t financially strong and has pulled in its horns.
However, companies like IBM Global Services, and even troubled
Computer Sciences and EDS have plenty of cash to buy these companies.
Source: Personal knowledge of the industry, developed by reading
newspapers and investment newsletters, and the Value Line Investment
Survey report on Black Box. Value Line is available at many libraries.
2) Television
The merger of AT&T Broadband and Comcast, approved last week, is the
biggest, but far from the last. Here’s an excerpt from a news release
at http://www.harris.com/view_pressrelease.asp?act=lookup&pr_id=905:
“Five years ago, the 25 largest TV station groups controlled 25
percent of all U.S. commercial stations; today the figure stands at 45
percent. And with the FCC likely to relax, if not eliminate, the
35-percent ownership cap, that trend will almost surely accelerate.”
The FCC is looking into this right now
(http://www.fcc.gov/ownership/). Expect regional broadcasters to join
forces and merge to avoid being bought out by national players like
Cox and Cablevision. And expect cable TV companies of all stripe to
seek deals with satellite providers to broaden their reach. Never has
scope been more important in this industry.
3) Food-service distribution
There are only three major players in this market. Sysco, Ahold, and
Performance Food Group. Together, they represent only a small fraction
of this large, highly fragmented market. All of the big boys grow by
acquisitions, but as the economy recovers, look for Sysco and
Performance Food to step up their buying.
Trends for this business look good, as more people are too busy to
cook and eat more meals away from home. That is unlikely to change,
suggesting industry sales growth is likely to continue.
Source: Value Line reports on Sysco, Performance Food Group, and Food
Wholesalers Industry
4) Semiconductors
Most of the major technology sectors have seen considerably
consolidation in recent years. But things have slowed down since the
market tanked in early 2000. Semiconductor companies in particular
have reduced their spending. But microchips are still the building
block of much of America’s industry.
Expect consolidation for these reasons: First, many smaller companies
are in dire straits, and as they go under, larger and stronger
competitors will practice a form of “vulture capitalism” and buying
them up for rock-bottom prices. Second, a lot of industrial users of
semiconductors are realizing that they can get better prices if they
make them themselves. Expect more computer and electronics companies
to consider buying up chipmakers for their production facilities.
Third, technological advances continue to be made in electronics and
telecommunications. Despite concerns from some industry watchers,
demand for semiconductors is likely to pick up in 2003 and 2004, and
remain fairly strong in perpetuity. There are plenty of entities with
deep pockets that want a bigger share of that pie.
Sources: Value Line report on the semiconductor industry and
http://triangle.bizjournals.com/triangle/stories/2002/01/28/focus5.html
5) Pharmaceuticals
The biggest pharmaceutical companies, like Pfizer, Merck, and
Bristol-Myers, aren’t getting the productivity they used to out of
their research and development. Pfizer’s upcoming purchase of
Pharmacia brings the drug kingpin a bunch of new drugs. And there’s
the rub.
Big drugmakers have been purchasing drugs from other companies for
years, or striking marketing deals with smaller rivals who don’t have
the promotional muscle to turn the drug into a $300 million seller
rather than a $30 millions seller. Yet the press for sales and profit
growth continues.
There are any number of small drug companies that have attractive
products, either on the market or soon to hit the market. With stock
prices low, few drugmakers have the equity currency to do big deals.
But some, like Pfizer, still have the wherewithal. As soon as market
values start to recover, expect a rash of purchases of small drug
companies, as the major players try to buy growth.
Source: Personal industry knowledge.
6) Steel
Steel companies have consolidated before, but for the last several
years most have moped around like dogs whose owners have beaten them.
Yet the imposition of new tariffs breathed a little life and hope into
an industry that was down on itself.
The Steelworkers Union has its own agenda, but it’s right when it says
that changes must occur. The tariffs breathed new life, but that
breath won’t last too long. There is still too much capacity out
there. When there’s too much capacity, low-cost producers win out. In
the steel industry, the biggest producers are usually the low-cost
producers. Despite competitive pressure from foreign rivals,
steelmakers recently pushed through a price increase, and if the
industry’s sales and profit numbers look good over the next one or two
quarter, industry leaders will start looking for potential acquisition
targets. Some may even be looking now. There are still plenty of small
mills out there, ripe for the picking. And scale has always been
important in this industry.
Source: General industry knowledge,
http://www.appliancemagazine.com/article.cfm?articleIndexID=1277, and
http://www.uswa.org/092002BasicSteelPolicyFINALStatement.htm
7) Software
This is the largest and most diverse group of companies in the
technology sector. The industry as a whole brought in more than $137
billion in revenue in 2001. There are thousands of software
developers, many of whom have useful, marketable products, but no way
to capitalize on them. Then there are companies like Microsoft, IBM,
Oracle, and a host of others with huge software operations and wads of
cash waiting to be spent.
Many big software companies are already bellying up to the buffet to
buy smaller companies. In many ways, this industry resembles the
semiconductor industry in that as small companies go bankrupt, bigger
ones buy their programmers and intellectual property. This trend
should accelerate when overall technology demand picks up, and
mid-market companies start generating enough cash to put them in the
hunt as well.
Cross-selling is the name of the game in software. Microsoft showed
everybody how to do it. Expect more application providers to buy
database companies, database companies to buy CRM providers, and CRM
providers to buy application providers. It’s a vicious circle out
there, and the software industry is huge, and full of tempting
acquisition targets. The big will get bigger, and extend their
offerings in an effort to become the next Microsoft. (I know, I know.
Software developers say they hate Microsoft. Well, they do. But the
goal of most businesses is to get bigger. And the goal of big
businesses is to become industry leaders. Microsoft did that.
Regardless of what you think of Bill Gates’ tactics, his approach
worked.)
Sources: General industry knowledge and Value Line report on the
software industry.
8) Department stores
This is a different kind of consolidation. As discounters steal market
share from department stores, many of the traditional retailers are
scaling back. Retailers must build new stores if they want to grow
sales. Those that lack the resources to build in this economic climate
are falling behind.
The strong will survive. Expect bigger stores to make judicious
purchases of smaller stores, but for the most part they’ll probably
just let the space lie fallow until Wal-Mart or Costco buys it.
Source: http://www.businessweek.com/investor/content/mar2002/pi20020319_9214.htm
9) Airlines
This is a no-brainer. Only one (Southwest Airlines) is strong. A few
are hanging in there, while most are weak. Expect massive
consolidation here.
There aren’t many airlines out there, but the ones doing the best are
to a certain extent following the Southwest mold of low-cost,
specialized service. Can old-line airlines like United and American
adapt? Time will tell. But while they attempt to do so, some will
stumble. Stronger players will buy up their planes and airport slots.
Trying to pick the winners? Look for companies that are strong enough
to earn federal loan guarantees, and those that manage to gain
concessions from their unions. They are the ones likely to last out
the nuclear winter for air travel.
Source: General industry knowledge, and Value Line report on the air
transport industry.
10) Truck leasing
This is a business often overlooked, but consolidation is already
starting to take place here and is likely to pick up speed very soon.
Why? Because leasing is by nature a regional industry. There are few
national players, but those nationals that do get into the business
are humungous, like General Electric.
GE Fleet Services just purchased Wells Fargo’s business, while Penske
has bought up several competitors. Expect the biggest players to
continue buying up smaller companies to expand their national
footprint.
Source: http://fleetowner.com/ar/fleet_consolidation_leasing_industry/ |
Clarification of Answer by
vercingatorix-ga
on
02 Dec 2002 09:28 PST
Here are five more industries:
Dialysis centers
Companies like Renal Care are expanding rapidly. The reason:
Health-care services providers are enjoying robust growth and fairly
high profit margins. Same-store treatments are on the rise, a
situation that appeals to larger providers in search of growth.
A number of industry participants, including Renal Care, have the
resources and wherewithal to make purchases. And it’s usually cheaper
to buy an existing center than to erect a new one and build up a
customer base.
Source: General industry knowledge,
http://www.renalcaregroup.com/html/news/2002/2002_news_-_october_30.htm
Biotechnology
A lot of biotech companies are just drug companies. But many of the
most interesting products and ideas are being produced by tiny
companies. Research productivity is down, and the bigger companies are
desperate for new growth avenues. Biotech sectors I consider
particularly vulnerable to roll-up are genomics, agricultural biotech,
and cybernetics. These are industries complementary to other, larger
business sectors, and as such may prove attractive acquisition targets
for more mainstream companies.
The story I cited below deals with European consolidation, but the
fundamentals should apply in the U.S. as well.
Sources: http://www.agbioforum.org/v1n2/v1n2a10-joly.htm and general
industry knowledge.
Indian technology
This is not an industry, as such, but a geographic sector ripe for
roll-up. India is full of well-educated techies who have started
software, hardware, and services companies. Microsoft, Intel, and
other large companies are already active in this region and are likely
to become more so. As these Indian companies become more successful,
they become attractive acquisition targets for companies suffering
from a slowdown in growth.
One big problem American companies have in generating growth globally
is the difficulties with language and communication culture. Coca-Cola
can sort this out by using advertising and marketing agencies in its
target companies, but with technology companies, particularly software
and services, communication with users is an integral part of the
product. Products must be developed with a different user base in
mind. Thus the appeal of quality products designed by people who
understand the culture in a large, developing market.
India isn’t the only place in which such roll-ups are likely to occur.
China, and a number of companies in South America, Eastern Europe, and
Africa leap to mind. But India has the largest middle class in the
world, and a huge number of entrepreneurs. It’s probably the next big
target.
Sources: General industry knowledge, gathered from a variety of
feature stories on India and other developing nations (actual stories
not cited, as none individually made this point but all combined to
point me to it.)
Ultrasound equipment
This is an industry ripe for consolidation simply because the products
are increasingly important in new markets. Not only are existing users
upgrading their equipment, but peripheral industry segments are
starting to use more equipment. That kind of growth potential rarely
fails to attract the interest of companies that market other products
to the peripheral markets.
Cross-selling is the name of the game in the medical-equipment
industry. Expect sellers of other kinds of treatment and diagnostic
equipment to buy small companies specializing in ultrasound equipment
to broaden their product lines.
Source: http://www.diagnosticimaging.com/dinews/2002091201.shtml
Security
A combination of increased government investment in homeland security
and an increase in individuals’ security consciousness has vaulted
makers of alarms, locks, and other protection systems into the
limelight.
This is a highly fragmented industry, with a lot of local and regional
providers. Expect national companies to buy their way into new
regions. More importantly, expect industrial companies of all stripes
to buy their way into the security industry. GE did that last year,
but most of the potential buyers will be interested in much smaller
acquisitions.
It’s a good time to be in the security industry, but little attention
has been paid to companies buying their way in. The trend has legs.
Now that it is apparent that the security craze is more than a fad,
expect more consolidation.
Source: http://www.canasa.org/english/assocprofile.htm and general
industry knowledge.
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