By Steve Maxwell
Summary: Over the next three months, WC&P will run a series of “Drinking Water Dollars” columns on the water industry and its increasing propensity for mergers and acquisitions. This is the first installment.
A strong consolidation trend has been gathering steam in the water industry over the past several years, punctuated by blockbuster acquisition and merger transactions dominating the business news.
First, during the mid- and late-1990s, we watched as USFilter rapidly consolidated many of the leading U.S. water companies — including Culligan, Davis Water and Waste, and Memtec. Smaller consolidators like Waterlink also emerged, and started to buy up numerous small water technology players. Traditional chemical firms BetzDearborn and Nalco (now ONDEO Nalco) were snapped up by larger consolidators. Firms like Recovery Engineering and Glegg Water Conditioning were purchased and enveloped by larger and more diversified retailers, such as Procter & Gamble and General Electric, respectively. Most significantly, the large British and French water infrastructure firms — companies like Vivendi, Suez, Thames Water, Severn Trent and RWE — have burst onto the American water scene, often seeming to buy up any available water asset at hugely inflated prices. Most of the publicly traded water utility companies have now been gobbled up by European interests.
In addition, we’re likely to see this trend toward greater consolidation — and more merger and acquisition activity — continue for a few more years. Given the potentially vast longer-term economic opportunities presented by the water business, and the fact that equity valuations in the industry remain at relatively low levels, the prime driver behind many acquisitions is the relative price of the assets. Simply, the cost of buying into the business is often lower than both the cost and the consequent time delays of building a similar business from scratch.
‘Urge to merge’ mode
Practically all water firms have found themselves in the position of strategically evaluating merger and acquisition (M&A) transactions — as a buyer, seller, and sometimes both. This “urge to merge” is alive and well in the water services industry, even though there’s clear evidence that bigger is not necessarily better in this business. And although there already has been considerable consolidation through M&A activity, one recent study by Environmental Information Inc., of Minneapolis, estimated that as many as 20 percent of all water service firms have “disappeared” through attrition or consolidation over the past five years. It’s likely we’ll see quite a bit more consolidation activity before the economic “re-arrangement” of this industry reaches completion.
In this series, we’ll examine this merger and acquisition trend in more detail and evaluate its strategic implications — both for individual companies and the industry as a whole. Here, we deal with why so many firms are attempting to grow through M&A strategies. In future columns, we’ll look at the what and how issues — what are the key factors companies consider in evaluating transactions, and how are deals typically valued, negotiated and structured. Finally, we’ll evaluate what a new and combined entity can do, after the deal is done, to make sure the acquisition is successfully integrated and original strategic objectives are realized.
When company valuations are relatively low, as they are currently, all the other (and perhaps more fundamentally strategic) reasons behind acquisition-based growth strategies become even more attractive. Key among these strategic drivers of the acquisition process are the following ideas:
Diversification into new market niches or new geographic regions: A broader marketing reach, either into new end markets or geographic regions, is often the primary reason for an acquisition. Certainly, many of the transactions seen during the past few years were geared to filling in gaps in the buyer’s effort to build more national coverage. Phrases such as “we need to be able to offer complementary UV capabilities” or “we need to have a strong California distributor” are heard frequently from growing companies in this business. Along a similar vein is the acquisition of certain types of service capabilities or specific industry expertise, i.e., membrane treatment capabilities, or an expertise in ultrapure water for the electronics industry. Since the target firm may have a strong reputation or business concentration in specialized end markets; immediate access to those end markets may be the objective of the acquiring firm.
Simple growth in revenue or earnings: The inexorable drive for greater absolute size and market share has long been a basic tenet of American business. With greater market share, the reasoning goes, comes a broader set of capabilities, a stronger competitive position, greater control over pricing and, presumably, the potential for higher long-term profitability. Despite evidence that greater size doesn’t necessarily confer greater profitability, the last several years of maturation and shake-out in the water industry led many firms to turn their strategic focus toward growth through acquisition. As industries mature and become more competitive, it’s typical to see the financially stronger players consume the smaller and perhaps weaker players. In short, it becomes more efficient and quicker to grow by acquiring assets than by building them internally.
Achievement of greater efficiencies: As a corollary to the above, many acquisitions are fundamentally driven by the desire to achieve greater operating or marketing efficiencies, or to spread a fixed overhead and cost structure across a larger volume of business, i.e., achieving better economies of scale. Two of the first things evaluated in most prospective deals are the potential for elimination of redundant overhead expenses, and the potential for broader utilization of an existing marketing and distribution infrastructure.
Acquisition of a new and broader customer base: A key driver behind many transactions is the acquisition of a more extensive and diversified customer base. Many acquirers have in mind to simply buy the target company’s “book of business” in an effort to build or maintain their own revenue levels; however, acquiring a company and then transferring its business from one group of professionals to another, or from one physical facility to another, isn’t always as easy as it sounds. Clients may be creatures of habit — historical personal relationships, the logistics of meetings and service delivery, and other routine factors — that may make the shifting or retention of revenues after an acquisition difficult. It’s particularly difficult to shift business in a professional services industry, where it’s really the people themselves that the customer is “buying;” hence, a prime concern in any acquisition in this industry is the retention of key “rainmakers” and major client contacts.
Strengthening or broadening the capabilities of the work force: Sometimes, strategic acquisitions are driven by the need for additional management or technical expertise. As the availability of trained staff becomes more thinly stretched across the industry, the water industry may gradually evolve into more of a “seller’s market” where highly trained and experienced individuals can command high premiums. And even though managers can often be individually hired away from the competition, acquisitions can provide a ready-made team of “experts” to develop a certain market or product.
Acquisition of other capabilities to meet customer needs: Besides professional staff, customers and market access, a buyer may want to acquire patents, computer programs, proprietary technologies and products, or other “hardware/software” that the target firm controls. In the case of equipment manufacturers, the selling firm may wish to access distribution channels provided by the acquiring firm.
Diversification into related businesses: Vertical or horizontal integration and diversification are natural means of growth and survival in any industry. The urge to deliver “one-stop shopping” was essentially behind the acquisition spree and subsequent growth of USFilter in the 1990s to not simply be the biggest player in one sector, but to diversify both horizontally and vertically within the broader water industry. In other words, to be all things to all people. Many of the larger acquisitions of the past several years (see M&A in Water Treatment) have been attempts to build a diverse base of expertise in preparation for the expected future boom in the overall water business.
Elimination of direct competition: As mature industries lean toward oligopolies, firms sometimes acquire with an intent to consume and eliminate their competition. Although their intentions aren’t usually stated in such direct or Machiavellian terms, this effect often occurs in industries that have reached a concentration level where just a few firms dominate the industry. During the height of their acquisition spree, USFilter was accused of trying to do this in certain end markets.
In a mature and highly competitive market—like many sectors of the water business today — most mergers and acquisitions are ultimately driven by two factors. One, the desire to buy revenues, not only to maintain a given size but also to build a larger and more dominant strategic position for the future. Two, to spread costs over a larger volume of business. Today, many buyers are strategically buying market share by piecing together organizations they hope can be leading companies as the parent company continues to grow and evolve. These transactions are facilitated — not necessarily caused—by generally low equity valuations. As it becomes cheaper to employ acquisition-based growth strategies, the pace and extent of M&A activities inevitably heats up.
Next month, we’ll discuss the factors that a buyer sees in evaluating a target—the due diligence process—once the target company has been identified and approached.
About the author
Steve Maxwell is managing director of TechKNOWLEDGEy Strategic Group, a Boulder, Colo.-based management consultanting firm specializing in mergers and acquisitions and strategic planning services to the water and environmental services business. Maxwell is also the editor and publisher of The Environmental Benchmarker and Strategist, an industry newsletter covering competitive and financial developments in the broader environmental services industry. He frequently consults with water companies on strategic planning and M&A issues. Maxwell can be reached at (303) 442-4800 or email: [email protected].
M&A in Water Treatment
The following list isn’t intended to be exhaustive, but here are consolidations of note in the water treatment industry over the past five years:
* GE acquires BetzDearborn
* Vivendi Environnement sells USFilter Filtration & Separations Group to Pall Corp.
* Crane Environmental picks up Kavey Water
* Danaher buys Viridor Instrumentation from Pennon Group
January 2002:Glacier acquires Pure Fill assets
December 2001: Ionics sells Aqua Cool to Perrier
* Severn Trent buys Clean Environment Equipment, Sound Analytical Services, and merges seawater and marine disinfection business with Gruppo De Nora
* Germany’s Wedeco picks up Australian Ultra Violet Products
* National Filter Media obtains Snow Filtration Division from BBA
* IMC Global sells salt and Ogden, Utah, businesses to Compass Minerals
* Crane Co. sells Powers Process Controls business to Watts Industries
* USFilter buys Modular Environmental Technologies
* Germany’s RWE acquires American Water Works
* USFilter acquires EarthLiquids, ProCycle Oil & Metals, Modular Environmental Technologies
* North American Filtration picks up Waterlink Mass Transfer
* M-I LLC buys Sulfatreat
* Osmonics sells Orec ozone test chamber and ozone monitor business to CCS Instruments
* Tomlinson Industries buys product lines from Pro-Flo Products
* Trojan Technologies acquires Pureflow Ultraviolet Inc.
* Severn Trent Services snaps up Ecometrics Inc.
* Tyco’s Earth Tech obtains Cydsa Group of Mexico, Jones Environmental Ltd. of Ireland
* Sta-Rite Industries acquires Vico Products, Ultra Jet Plastics and Ultra Jet Canada
* Fairey sells three of four filtration divisions — Fairey Arlon to Parker-Hannifin Corp. USA; Fairey Microfiltrex Ltd. to Porvair plc, and Fairey Industrial Ceramics Ltd. to an undisclosed buyer
* WaterInvestments.com enters relationship with Standard & Poor’s
* Watts Industries purchases Phoenix’ Premier Manufactured Systems, Italy’s Fimet S.r.l.
* Canada’s Waterite Technologies acquires Filter Soft Canada
* USFilter buys Scaltech
* Sterlitech Corp. picks up silver metal membrane product line from Osmonics
* Wedeco buys Korean UV firm Sung Jin Entech Corp.
* Crane Environmental purchases Force Filtration Systems
* Strategic Diagnostics absorbs Azur Environmental
* NSF acquires Cook & Thurber LLC
* Parkson Corp. buys Waterlink’s Separations Division, American Bulk Conveying
* Best Water Technology Group (BWT) gains controlling interest in Swiss’ Christ Group
* Trojan Technologies purchases assets of Advanced Ultraviolet Solutions
* UL acquires Environmental Health Laboratories
* Elkay sells CORDLEY/Temprite to Sunroc
* Groupe Danone buys big stake in Mexico’s Pureza AGA and Poland’s Zywiec Zdroj
* ResinTech purchases Ion Exchange Products
* Norit NV bought by Nuon
* Wedeco buys Germany’s Advanced UV Light GmbH
* Ronningen Petter purchases Group Aoustin
* Crane Co. acquires the Industrial Flow Group of Alfa Laval Holding AB and the Valve Repair Division of Groth Corp.
* Severn Trent Services buys Universal Aqua Technologies
* United Utilities picks up Hyder plc’s industrial services unit
* Amiad Israel purchases Filtration Ltd. from Tedea Ltd.
* Perrier acquires California’s Black Mountain Spring Water
* Groupe Danone picks up McKesson Water Products
* RWE buys UK’s Thames Water
* Aquion/RainSoft acquires Erie Controls
* BBA purchases remainder of AQF Technologies from Hoechst Celanese
* Electro Pure sells Hydro Components to ResinTech
* Waterlink sells Aero-Mod to Resi Enterprises
* Perrier buys Canada’s Aberfoyle Springs
* Enron reacquires spun-off Azurix Corp.
* Germany’s Bayer Corp. buys Sybron Chemical
* Parker Hannifin picks up Whatman plc’s industrial filter business
* Sta-Rite picks up Park International
* Marmon Group acquires Alamo Water Refiners
* Flowserve Corp. purchases Ingersoll-Dresser Pump Co.
July 2000: Loeffler Filtration and GAS Filter Systems merge with Hayward Industrial
* Groupe Danone acquires Naya
* Pump deals include — Watson-Marlow Bredel buys Alitea; Industri Kapital acquires Alfa Laval; IDEX purchases Trebor International; and Grundfos picks up Myson Pumps, Sarlin Pumps
* Suntory picks up Georgia Mountain Water
* Vivendi sells Metcalf & Eddy to AeCOM
April 2000: Wisconsin Energy merges with Sta-Rite, SHURflo and Hypro parent WICOR
March 2000: Service Systems International buys remainder of UV System Technology
* Groupe Danone buys McKesson Water Products
* Wedeco picks up Ideal Horizons
* Severn Trent Services acquires ClorTec
* ResinTech buys Osmonics’ Vaponics Aries DI Loop and cartridge product lines
December 1999: Sefar America acquires Filtra/Spec Inc.
* Thames Water picks up New Jersey’s E’town
* Bechtel, Edison agree on major stake in International Water Ltd.
* Hayward Industrial buys International Specialty Products’ bag filter business
* Amcol International’s CETCO sells filtration services business to Barneby Sutcliffe
* GE Power Systems acquires Glegg Water Conditioning
* Azurix buys Lurgi Bamag GmbH, J&J Baker Enterprises and Brazil’s AMX Acqua Management
* Severn Trent Plc. purchases Tetra Processes, Samsco, Precision Laboratories and Savannah Laboratories
* Suntory Water Group picks up Clearidge Inc.
* Suez Lyonnaise des Eaux acquires United Water Resources
* Kemira Kemwater, Purac, VBB Viak and Swedish Water Development form Swedish Water Corp.
* Citizens Utilities sells water and wastewater business to American Water Works
* Vivendi merges USFilter’s Operating Services Group and Générale des Eaux’s Professional Services Group
* Procter & Gamble purchases Recovery Engineering (PUR)
* American Water Works buys several water utilities from United Water Resources
* Osmonics acquires ZyzaTech Water Systems
* Azurix buys interest in Mexico’s Industrias del Agua
* Suez Lyonnaise des Eaux buys Nalco Chemical, Imetal SA’s water chemicals unit Calgon Corp.
* PTC Group and PTC Holdings merge to form Ocean Power Corp.
* Danaher Corp. picks up Hach Co.
* Rohm & Haas buys Morton International
* Suez Lyonnaise buys Nalco
May 1999: Aquarion purchases by Yorkshire Water (Kelda Group)
April 1999: Nalco Chemical buys UK’s ACP Products and Services, Du Bois Chemical Italia, and Finland’s Tampereen Prossessi-Insinoorit Oy
* France’s Vivendi buys USFilter
* American Water Works acquires National Enterprises Inc.
* ITT Industries purchases Water Pollution Control Corp.
* Azurix buys interest in Grupo Mexicano de Desarrollo
* Ionics obtains M2 Innovative Solutions
January 1999: Suntory acquires Cloister Spring Water
July 1998: BetzDearborn, Hercules agree to merge
* Osmonics finalizes Membrex acquisition
* Crane Co. purchases Environmental Products USA
March 1998: Marmon Group buys Matt-Son
* Culligan agrees to be acquired by USFilter
* Osmonics picks up Micron Separations Inc.
January 1998: Culligan buys Water Services Corp./Mermaid
* USFilter acquires Kinetics and Memtec
May 1997: Pall Corp. buys Gelman Sciences
* USFilter acquires U.S. Water & Wheelebrator
* Cargill Salt buys Akzo Nobel Salt
February 1997: Culligan acquires Ametek/Plymouth Products
December 1996: Osmonics buys AquaMatics
July 1996: Osmonics acquires Desalination Systems Inc. (Desal)
January 1996: Culligan picks up Bruner
— Carlos David Mogollón, WC&P Executive Editor