Mergers & Acquisitions
Last fall, it was hard to ignore the buzz among building service contractors surrounding the most recent newsmaking acquisitions. Mergers and acquisitions are an inherent part of the industry, but these two deals were much larger and more significant than most seen in years.
In September, Australia-based United Group Limited, a diversified service and infrastructure company, announced the $408 million purchase of Newton, Mass.-based Unicco, one of the biggest facility services companies in North America. Less than a month later, San Francisco-based ABM Industries Inc. — a massive facility services company that includes ABM Janitorial Services — purchased OneSource Services Inc., of Atlanta, in a $365 million deal.
BSC mergers and acquisitions go on all the time, and no one knows that better than Guy Mingo, CEO of Marsden Holding, St. Paul, Minn. His company is growing fast thanks to an acquisition model that purchases companies but leaves their management, staff and name — leaving in place what has made them successful.
“What is a little different this time is that the larger companies, selling to even bigger conglomerations, is a bit new. I mean, those are what I describe as sleeping giants that haven’t really been that active in the acquisition world for a number of years,” Mingo says.
In the unique case of Unicco, which had $750 million in annual revenue, United Group was not interested in slimming down operations. The Australian company, which is in a related industry but not by any means a competitor, saw a platform for growth in the North American market. United Group already has a presence here with a Chicago-based corporate real estate firm.
“They bought us for three reasons,” says Unicco’s Vice President of Marketing, George Lohnes. “The strength of our operation, our management and our strong customer base.”
United Group, which has recently renamed the acquired company UGL-Unicco, provides the BSC with a base of operations that is self-sustaining and still able to grow organically, Lohnes says.
“They paid a fair price [for Unicco],” he says. “Obviously we have to hit our numbers, but they’re not looking for us to achieve those numbers through rationalization. They want us to grow so we’re in a very different situation than some others might be.”
Benefits that come along with being bought by a company like United Group include access to capital, business experience and program integration.
“They’re a dynamic organization and that’s something that’s going to be very exciting to be part of,” he says.
The bosses in Sydney aren’t looking to change much, and very little turnover is expected with the Unicco acquisition. In fact, United Group is a company that shares many of Unicco’s values, such as sustainability, Lohnes says — something he learned when giving the CEO and board chairman what he thought would be a brief presentation on the company’s green cleaning program. Not only do execs understand sustainability, evidenced by a lengthy and educated discussion on the topic, he says, but they’re active in creating their own innovative programs.
The other purchase that has BSCs talking is ABM’s buy-out of OneSource, a 31,000-employee company that did more than $800 million in sales the year prior to March 2007. ABM — with more than $2.7 billion in revenue during fiscal 2006, and 75,000 employees — will receive a big tax break, about $14 million a year, from having purchased the loss-making OneSource.
The acquisition was completed in November, and ABM wants to achieve up to $32 million worth of cost synergies this year, according to a company press release. Cost contractions will be made through a reduction in duplicative positions and back office functions, the consolidation of facilities and eliminating professional fees and other services. Within a year of closing, ABM expects to operate the combined company with annual run-rate cost synergies of $45 million to $50 million. The purchase helped ABM accelerate its growth strategy, states Henrik Slipsager, president and CEO, in the release. ABM declined an interview when contacted for this article.
Who is affected?
The acquisitions will affect the industry, most say — though not all agree on those effects or their extent or severity. Some, like Gary Penrod, an industry merger and acquisition consultant, don’t see them as more than a “blip” on the radar screen of this extremely fragmented industry. Acquisition is all about strategy, and different companies acquire for different reasons. Penrod says to view these moves as particularly significant might be blowing them out of proportion. The consolidations are pretty minor when examined as part of the big picture, he says.
“We have experienced just a steady flow of activity and much of the time it is simply that this is an entrepreneurial business and it’s the case where nothing is forever and people do want to change — they retire, so they want to sell their business,” he says. “More often than not, it is to a strategic buyer, someone who is already in the industry. Sometimes there are investor buyers but that is really for the larger transactions.”
OneSource, ABM, Unicco — they’re all “jumbo” BSCs and represent an estimated 5-6 percent of the total market in the U.S., Penrod says. Whether they’ve joined forces or gained financial support from a foreign parent company, a majority of BSCs probably won’t be affected, he says.
“There’s still a lot of activity, there’s still a lot of companies out there. It’s kind of like the GNP in the United States, it’s made up mostly of small business, but all you hear about is the large, Fortune 500 companies,” Penrod says. “It’s the same in this industry — it’s the small mom-and-pop companies that have a major portion of the market.”
The large regional or national contractors that compete with the jumbos in cities such as Miami and Chicago might see the dynamic in those metropolitan areas change, say BSCs. But those smaller contractors may not feel the effects of such large, national deals for a while, if ever.
Any time a company changes hands, especially if integrations result in the loss of employees, relationships that customers had with those employees go away. Local and regional players can play up their roots in the community and their local management teams, says Jeffrey Packee, president of CleanPower in Milwaukee. CleanPower is owned by Marsden Holding.
“There’s always a ripple effect, and sometimes it happens right away and sometimes it takes two or three years,” Packee says. “And that’s one of the things we watch carefully, because if you don’t keep the management and they’re not staying close to customers, then their business starts to erode. In our business, there’s a lot of companies out there adding $5-$10 million a year but they’re losing $5-$10 million in business so they’re really just treading water.”
There’s no doubt the field is narrowing for regional BSCs like United Services of America, Stamford, Conn. Earlier in the decade, most BSCs were bidding against twice as many competitors as they are now, says Paul Senecal, company president. The fewer the choices, the greater the chance of being chosen, he says, so in a way, big mergers and acquisitions can present opportunity for the larger, competitive BSC to increase market share.
More opportunities come as the transition period for merging companies makes talented managers and workers, victims of necessary operational streamlining, available, Senecal adds. It also could present a chance to compete for more customers.
But are there some businesses who will not fare so well in the wake of so much M&A activity and a globalized outlook? The local mom-and-pop BSCs will survive, regionals will thrive, and nationals and internationals continue to grow and firm their footing — but the companies operating in the $10 million to $50 million range are struggling, Mingo says.
“We’re a very fragmented industry at the end of the day, even if you take out the top 10 or 15 companies, but it’s the mid-sized companies that are not being reborn, I think, because of the challenges that come along with being big today,” Mingo says.
Faced with market pressures as well as financial, liability and pricing challenges, companies that are in between the small and regional markets are having a tougher time in the industry, he says. And globalization will only create more price pressure and margin shrinkage, so it’s not getting much better for those mid-sized companies.
“I think [the mid-sized BSC] will vanish — it is vanishing,” Mingo says. “Those are the size companies we are seeing saying, ‘This is becoming tougher to go alone and we need to partner with somebody,’ because of the pressure they do have in the markets they’re in.”
Path to globalization
Lohnes thinks UGL-Unicco is just the beginning of a wave of cleaning industry consolidations that are naturally following the globalization path many other industries have paved. BSCs have witnessed the trend for customers to outsource larger portions of their portfolios in a more strategic manner, he says.
“So instead of someone looking to outsource their buildings in Boston, say, and it’s a corporate account, they’re looking to outsource all their buildings wherever they might be in North America. And because of that, in order to be able to answer customer needs effectively, companies need to have a certain footprint of a certain scale and I think we’ve definitely seen an acceleration in that trend,” Lohnes says.
No matter what the strategy, many acquisitions make solid business sense, says Tim Murch, president of Mitch Murch Maintenance Management Co. (4M) in St. Louis. Timing has driven recent purchases, whether they’re exit strategies or synergistic in nature.
“I feel it’s all relative and some of it’s just a timing issue as compared to a wave. It’s always gone on and will continue to go on,” Murch says.
4M is an active strategic purchaser and an opportunistic purchaser, but acquisitions need to make sense for both the buyer and the seller — and that always depends on situation and buyer strategy, Murch says.
“I don’t know that there’s ever really a ‘wave’” of consolidations, agrees Senecal. ABM consistently acquires businesses, he says; obviously, OneSource is a large competitor for them to buy, but acquisitions are nothing new for ABM. The Unicco acquisition is notable, however, because it involved a purchase by a large foreign company. That is a new trend in the cleaning industry, he says.
“You’re seeing companies in foreign countries, investment groups, now buying very, very large cleaning companies. That is a little different that what’s been happening,” Mingo says. “In the midrange-size company, day in and day out that’s happening, there’s mergers, there’s acquisitions. But what you’re seeing that’s different is investment companies or even larger European companies that are now reinvesting into the United States and they’re looking for very, very large targets.”
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