As this article comes to print, we will be well into 2005. We will already have read many columns discussing the significant events of 2004 and heard various predictions of what 2005 will bring. Last year brought more mergers, acquisitions and as some describe it, a further rationalization of the water industry, than ever before. With respect to those mergers and acquisitions, I believe that the past, both recent and less so, is indeed prologue to the future. There will surely be further deals done in 2005 and beyond. In fact, I believe the next two to three years will see some of the headiest deal-making that this industry has seen.
Despite the huge volume of transactions to date, there has been (surprisingly) very little discussion as to what has been, and is, really fueling this activity. In other words, beyond the continuing consolidation of this industry, what is the motivation for all of the deals? Can it be as simple as: They stand on their own because of the financial benefits? Certainly the financial gains to be had are a crucial part of the story. If the deals do not offer the prospect of financial success, they won’t be done. However, as I have written before, there is much more at work here than financial alchemy, even if it is not obvious to everyone. You can be assured, despite the number and breadth of deals that have been completed or announced, the changes underway in the water industry are not obvious to everyone. Curiously, to the investment community, water is still not a meaningful arena.
At this point you are probably saying to yourself, “Oh, there he goes again, railing on about the industry being invisible.” The other day, I was out for a walk and it occurred to me that ignoring the water industry is simply an extension of the way many people go through their daily lives. By and large, people are so wrapped up in themselves, so consumed by their own concerns and insecurities, that they do not pay very much attention to their surroundings. I have tested the following theory and have proven the point over and over again. As you walk down the street and through the halls of your offices, people walk past you as through you are invisible. They appear to see right through you without recognition. I have found that unless I say hello, people will pass right by without as much as a nod. This happens with strangers and even with people you know. On the other hand, if I nod, or say hello, they generally respond in kind. When confronted, they generally apologize, saying they were focused on something and not paying attention.
I think something else is at work here. I think it takes some effort to pay attention. It is easier to just float along and wait for someone else to call attention to something. The evolving water industry is much the same. All these deals are being done and except for those in the industry, or those directly affected, few are paying much attention. However, there is hope for dramatic change. The famous French social psychologist, Gustave Le Bon (1841-1931), wrote about the psychology of crowds in revolutionary times. Le Bon’s argument was that man, when part of a crowd, is a very different individual from the same man as an isolated individual. His conscious individuality disappears in the unconscious personality of the crowd.
I believe that we are, today, in the early stages of a transformation brought about by the crowd forming around the water industry. As the new participants enthusiastically embrace the growth potential of the water industry, their zeal and determination to be players emboldens them to ever more aggressive behavior towards acquisitions and expansion. GE, clearly one of today’s leading players in water, was a virtual non-participant only a few years ago. Today, GE is a leading presence in virtually every area of water.
Additionally, we have seen the entry and expansion of other large, aggressive acquirers of water industry companies. For example, ITT Industries, Pentair Inc. and Watts Water Technologies have emerged as some of the most significant players, with many others coming on strong. All of these things are happening despite the general neglect of Wall Street. However, with the growing expansion of the mammoth players, ignoring the industry as an attractive investment area is growing difficult. This activity and a growing awareness is only in its early stages, offering the prospect of several years of unusually attractive investment opportunities. An appropriate comment may well be, “Come on in, the water’s fine!”
About the author
Neil Berlant is first vice president and managing director of the Water Group at The Seidler Companies Inc., of Los Angeles. Prior to that, he was with Wells Fargo Investments, First Security Van Kasper and UBS PaineWebber. Since 1986, Berlant has concentrated exclusively on business and investment opportunities in the water industry. He has been interviewed on a number of occasions by The Wall Street Transcript. He can be reached at (800) 840-1090 ext. 625, (213) 955-4990 (fax) or email: [email protected]