The DAK Group – Middle Market Investment Bankers

Continued M&A Flurry Forecast for 2017

commercial integrator

Continued M&A Flurry Forecast for 2017

Commercial Integrator Magazine featured insight from Ari Fuchs, DAK Managing Director, on the future of M&A in the Commercial Integration industry for 2017. A combination of strong balance sheets, low interest rates, high private equity cash and need for add-on services should keep the perfect mergers and acquisitions storm swirling.

The Commercial Integration industry experienced a truly transformational year in 2016. The rapid evolution of technology combined with shifting client needs has caused integrators to rethink how technology and services are delivered. Collaboration between voice, video and traditional IT is increasing and is causing a paradigm shift in how clients leverage technology to communicate and grow their enterprise.

In 2016, integrators successfully employed merger and activity (M&A) strategies to grow their businesses by acquiring complementary services and technologies, accessing new geographic markets and bolstering their presence in attractive and growing end markets. In addition, integrators leveraged M&A in pursuit of liquidity as both private equity and strategic buyers played an active role in the marketplace.

As integrators develop, refine and execute on their strategic plan for 2017, several notable and potentially impactful trends are worth considering.

Fragmentation Driving Industry Consolidation

The rapid rise of M&A in the industry is not too surprising. The macroeconomic environment has been defined by slow and steady growth for the past several years. Businesses across the board have been forced to supplement organic growth with mergers and acquisitions in order to remain competitive and deliver shareholder returns.

The economic environment has been supportive of this trend as corporate balance sheets remain strong, interest rates remain near historic lows and private equity has record-high levels of cash ready for investing. M&A moves have impacted both integrators and hardware manufacturers as each strives to remain relevant and competitive in their constantly evolving industries.

Fueling the consolidation trend is the fragmented nature of the integration marketplace. There are approximately 5,000 services and solutions providers in the U.S., representing roughly $16.9 billion in service-related revenue in 2016, according to a recent InfoComm study. The top 50 AV/IT/automation providers reported revenues of approximately $3.4 billion or 20 percent of industry revenue, with the remaining 4,950 providers making up the balance of $13.5 billion (80 percent) or $2.5 million average revenue per integrator.

Integrators Try Enhancing Value Proposition

The AV industry has historically been driven by project-oriented work — work that is often choppy and unpredictable, and subject to pricing and margin pressure. The rapid evolution of technology and shorter refresh cycles, combined with customers’ desire for unified communications and IT-centric solutions has created demand for sophisticated professionals with expertise beyond traditional AV.

Integrators that have made investments in people, infrastructure and support have the most to gain as the trend continues to develop and mature. Smaller, resource-challenged integrators are beginning to face an uphill battle with both IT and unified communications forming the backbone of today’s complex AV solutions. In addition, integrators without the infra-structure and experience to support managed services will find it increasingly difficult to profitably compete in a crowded, technologically-advanced marketplace.

In 2016, integrators actively used acquisitions as a means to build value for their customers, shareholders and employees. Acquisitions have helped integrators add complementary services that can be cross-sold to both new and existing customers; add depth and experience in certain verticals; and to expand geographic scale, both domestically and internationally.

To further demonstrate these trends, let’s highlight several 2016 transactions and their impact on both the buyer and seller.

AVI-SPL’s November 2016 acquisition of Anderson AV accomplished several objectives. First, it allowed AVI-SPL to further entrench itself in the California marketplace. Second, it provided AVI-SPL with a robust cadre of customers in the tech sector, a market that is expected to experience strong growth in the coming years. Third, the acquisition provided Anderson’s customers with a global solution and service footprint, a benefit Anderson on its own couldn’t provide.

Anderson AV “had established deep and long relationships with many companies that frankly we had been targeting for a long time,” AVI-SPL CEO John Zettel said. “That’s why it really checked the box in that it was the company that we wanted to pursue [especially with] the geography and those sectors.”

Similarly, Diversified’s acquisition of Technical Innovation in February 2016 provided it with significantly Greater exposure to a suite of complementary solutions and services. CI 2016 Integrator of the Year Diversified got its start in digital signage, broadcast and IPTV among other areas while Technical Innovation’s expertise is in the area of command and control and unified communications. There were very few areas of overlap, which made the acquisition even more compelling.
“The strategy is in response to our clients, who are looking for a global partner,” noted Diversified CEO Fred D’Alessandro. “It’s less about us and being big or being everywhere. In deference to our name, we have assembled a wide array of subject matter experts across the full spectrum of multimedia solutions.”

Smaller integrators were also active on the acquisition front. In April 2016, Alpha Video & Audio acquired Video Tech of Tallahassee, Fla., providing Alpha with further entrée into the live event and sports production market, particularly for colleges and universities. It also gave Alpha a physical footprint in the Southeastern U.S., enabling it to provide increased support and integration services to its clients in that geography.

“Acquiring Video Tech is a unique opportunity to expand our service and support coverage by adding outstanding engineering, integration, event support and SMA expertise,” Alpha CEO Kevin Groves said in that deal’s announcement. “Greater depth of capability for the Florida office will be supplied immediately by Alpha Video’s experienced technical and administrative teams.”

When developing a strategy around corporate growth, acquisitions will continue to play an important role for integrators. Buy-side acquisitions may carry a greater upfront cost, but they will often reduce the execution risk of building out one’s own team and investing in the infrastructure to support it.

Private Equity Appetite, Attractive Industry Collide

Private equity sponsors typically employ a buy-to-sell approach. The growth of the private equity sector is predicated on its standard practice of buying businesses and then, after steering them rough a transition of performance improvement and add-on acquisitions, selling them. This is at the core of private equity’s success.

The commercial integration industry particularly attractive to private equity investors for several reasons. First, the historically low-margin sector is experiencing somewhat of a rebirth. The pace of change in the AV industry, continued innovation in technology and the advent of IT-centric unified communications positions the overall industry for a period of sustainable growth.

In addition, the fragmented nature of the business provides exceptional opportunities for value-add, bolt-on acquisitions. And last, but certainly not least, is the rising importance of managed services and the recurring revenue streams it provides (valuation multiples are substantially higher for businesses that can demonstrate recurring revenues) make the case for expanding valuations in the sector.

All that said, private equity sponsors are looking for opportunities to build value in their portfolios and are seeing substantial value-creation opportunities in the integration sector.

For example, “Verrex is the ideal combination of a multi-generational business that has built a strong culture combined with an unusually talented management team,” said Jeffrey Schaffer, founder and managing partner of Five Crowns Capital, in announcing that firm’s acquiring of 70-year-old New Jersey-based integrator Verrex last summer.

“The company has a long history of providing exceptional services to some of the most demanding multinational corporations in the world. Their culture and expertise position the company well for significant future growth, both organically and through strategic acquisitions,” Schaffer says.

Look for More M&A Upcoming

Mergers and acquisitions played a major role in shaping (or reshaping) the commercial integration industry in 2016. There is no doubt that the momentum created last year will continue into 2017.

Last year’s megadeals generated a lot of positive chatter in the community and are causing many integrators to rethink their strategy and determine whether now may be the ideal time to either a) position their business for sale; or b) use acquisitions to build shareholder value.

Click on the PDF below to view the 2016 Strategic Transactions Snapshot and Recent Private Equity Transactions Snapshot.