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Pumps & Systems, August 2008

Editor's Note: This article includes information obtained from various sources and research and is intended to be a general overview of recent mergers and acquisitions and how they impact the pump industry. It is not a comprehensive list.

What was once considered a trend in the pump market is now becoming the industry standard as smaller pump companies are merging to form larger conglomerates. Credit the desire for one-stop shopping. Credit an industry where the urgent need for oil and gas and clean water continues to grow at a rapid pace, making delivery deadlines more critical and the requirements for more advanced technical and strategic growth vital. Most of all, credit a booming international market with far-reaching distribution demands.

According to a report by PricewaterhouseCoopers (Producing Value, May 30, 2008¹), there were more than 4,100 completed mergers and acquisitions (M&A) in the industrial manufacturing sector between 2005 and 2007.  There were 39 transactions worth more than $1 billion each for a collective value of $106.1 billion. Many of the smaller companies are also consolidating. According to the report, more than 1,400 deals had values of less than $100 million and nearly 2,500 had undisclosed values, most of which would have been on a small scale. In 2007, a record $97 billion changed hands, more than double the $45.7 billion that was traded in 2005, according to the report.

The motivation and rationale for sustained growth can seem endless. "The continued consolidation in the North American market has been driven by several factors-foreign companies looking to establish footholds in North America, expansion of products and services within a market niche and acquisition of undervalued companies whose potential have not been fully explored," explains Ed Harvie, vice president of new business development for KSB, Inc., a 130-year-old company that has extended its global range through the years with several M&As.

Globalization

While organic growth continues to exist, some companies simply do not have the resources or the reach to meet the industry needs worldwide, so they must join forces with other companies to compete, according to John Allen, president of the newly-formed Pump Solutions Group (PSG).

"There are a lot of forced synergies in a lot of industries, but they wake up one morning and say ‘Wait a minute . . . I don't have the same channel partner that you do. I don't sell the way you do, and I don't have the same raw materials,'" explains Allen, who says he believes mergers and acquisitions will become a necessity moving forward. "In this culture of the world of pumps, it is just too logical to take advantage of the two key areas of the supply chain-raw materials on the front end and distribution on the back end."

The pump market worldwide is worth more than $30 billion and is extremely fragmented, according to Allen.  "There are about six pump manufacturers that exceed $1 billion, which means there are hundreds of pump companies worldwide that are less than $25 million. About 70 percent of the pump requirements worldwide are now outside the United States. This is due to the great need for infrastructure in emerging nations. So if you realize that 90 percent of all high cranes to build construction worldwide are outside the U.S., that gives you another tipoff that in the emerging markets, that's where all the pumps are."

These statistics become important to smaller companies without a global footprint. Allen says his experience shows that combining the expense of acquiring the appropriate manpower with the time involved in developing channel partners, global procurement could take 5 to 10 years-too long for survival in this competitive market.

"For a smaller U.S. pump company to globalize, it needs to piggyback," Allen says. "For example, more than 60 percent of Wilden's total sales is international, and that is a key part of the PSG. Then you have hub and spoke going on . . . clearly, if Wilden is strong in Thailand and Griswold is virtually nonexistent, overnight there is a clear candidate for the Griswold product-which would take years for Griswold to examine and execute if they tried to go to Thailand. So the globalization factor is overwhelming for a small company. Piggybacking is needed expeditiously for survival."

Clifford Hahne, president of Hanson Pressure Pipe, contends that M&As will not bring an end to the smaller companies that focus on business within the United States. "In the U.S., there is free enterprise and that is what makes the U.S. great," says Hahne, who has been involved in several major M&As during his 25-year career. "There is always someone willing to go to work and try to compete with the multinational corporations. I think we will continue to see market assimilation in building products. You get a series of three or four international companies that do the majority of the work. Overseas you do not see a lot of mom and pops. You see only the bigger multinationals. The U.S. is different. We are driven by different drivers, like customer satisfaction and patriotism."

Still, global reach continues to be important for the industry. Combining resources helps to satisfy international needs more quickly and efficiently. The Weir Group recently acquired the CH Warman Pump Group (CHW) to broaden its mining and minerals processing efforts in Africa.

"This acquisition allows us to see our slurry pump line in all of Africa," says Scot A. Smith, divisional managing director of Weir Minerals Division. "This acquisition gives us critical mass in Africa. We can now invest in this region of the world with confidence."

Growing Pains - The Adjustment Period

Many executives agree that in a perfect world, the growing pains of mergers and acquisitions are generally only felt internally.

"The idea is to make the whole transition appear seamless to the end user," Allen says. "But the adjustment period is always an issue. We usually talk about integration. Due diligence-where everyone puts their efforts in an acquisition-is extremely important. Where the failures happen is in the execution of the integration."

That seemingly seamless effort can take months, even years, to achieve.

"It's like people finally make the purchase and they check the buildings and the codes," Allen explains. "The intellectual capital and the products fit form and function and so the management takes a deep breath and a sigh of relief. We clap our hands . . .  glad that's done  . . . and hope the integration will sort of take care of itself. That is where the nightmares take place.

"This is where you try to mingle embedded cultures. This group has always done things a certain way and someone comes in and says ‘Why don't you try it like this?' So the art in this is seeing how fast you can create universal buy-in, get in the same canoe and go down the river. There have been tremendous M&A failures in our industry and there have been successes. It is too early to say how fast we will integrate, but suffice it to say one of the lead-horse programs, Wilden, has been tremendously successful using speed as its greatest asset. I see speed as a greater asset than patent-which is first to market. I can assure you that the speed with which we are trying to integrate is probably one of the fastest attempted.  In 60 to 90 days we are attempting nothing short of a full integration of the sales channels worldwide."

In general, "Sometimes it takes years . . . sometimes it never works," Allen says.

Hahne agrees that the goal is to ensure the end user is unaffected, but there are hurdles.

"There are so many growth opportunities to continue to put our footprint out there," Hahne says. "But we have to take some time to get our balance sheet in order. It takes a while to fund a multi-billion dollar acquisition. It can take 18 months or more of regrouping.

"I was involved in an acquisition that went from a publicly-owned company in the UK to a virtual private company in Germany. There was a different form of accounting and a different form of measurement. They speak a different language and take different holidays. There are obvious pressures that come together. We hope the majority of the pressure stays with senior management so the others do not feel it.  I don't think the customer sees it in our industry, but the employees feel it. We are still a pipe company, we just have a different owner. But sometimes you bring companies from competing markets together and there is a little bit of pain in the consolidation."