Merger Mania (December 1999)
Fast forward 15 years, and I’ve relocated to Arizona. Once again, I’m on the lookout for a bank. Once again, I consult my handy dandy Yellow Pages. But surprise! This time it takes mere minutes to find a bank, because there are only two pages of bank ads. (And for my “convenience,” I can call a centrally located number and wait ten minutes on hold to find the branch closest to my house.)
Banks and other entities have been merging in record numbers over the last decade, leaving consumers wondering when it will end. The same has been happening in the hvacr world. Think about what’s happened in recent years: Carrier bought International Comfort Products, AlliedSignal bought Honeywell, Goodman bought Amana, York bought Evcon-Coleman and Sabroe. Of course, this is just the manufacturing end. We’ve also seen contractors purchased by consolidators and engineering firms being bought out by other engineering firms, as well as by energy service companies (ESCOs).
Opinions differ widely as to whether or not these acquisitions and mergers are good for the hvacr industry. Some believe that it will ultimately benefit consumers, because the hvacr world as it stands now is too fragmented. Others believe that when everything is said and done, there will be very little left for the “little guy” to do, as the mega-corporations will offer everything in-house (e.g., consulting, designing, building, engineering, financing, maintenance).
Whether or not these predictions are true remains to be seen; what is a foregone conclusion, however, is that the hvacr world will change, and the players will have to change as well, or risk losing their livelihoods.
Why Now?Just why these mergers and acquisitions are taking place right now really comes down to the economy. The economy is great right now, leaving many companies flush with cash (and increased stock values) that they can use to purchase other companies. And many companies subscribe to the philosophy that acquiring somebody else’s business is the best way to grow your own.
Manufacturers, in particular, are also looking to acquire companies that manufacture niche products (especially air-handling components), which may enhance the larger manufacturer’s product line. Providing a product that can offer a customer more benefits than a competitor’s product can help the manufacturer increase its own share of the market.
In addition, people are looking for economies of scale, says Joe Greil, CPE, immediate past president of Association for Facilities Engineering (AFE, Marlborough, MA). “You have a lot of companies that are combining and claiming all kinds of tremendous savings. People are looking for these economies of scale in order to be more profitable.”
But the industry has been ripe for acquisition for quite a while, says Bob Pokelwaldt, chairman and ceo of York International (York, PA). “On a global basis, it’s very fragmented. Frankly, there are just too many players, and I believe that’s a detriment not only to the manufacturer but to the consumer. I also believe it’s just a logical progression — we’ve seen it happen in other industries, and it hasn’t been surprising.”
The strange twist that’s happening now is that it is not just manufacturers buying other manufacturers — they’re also buying all kinds of different businesses that they believe will enhance their core competencies. For example, manufacturers are purchasing distributors, contracting firms, and engineering firms.
John Lord, president, Carrier Corp. Syracuse, NY, notes that Carrier has acquired four North American distributors (Carleton-Stuart Corp., Automatic Equipment Sales, Carrier of Canada, and Carrier of Florida), as well as several contracting firms. “Looking at the commercial business at Carrier, we have acquired several mechanical contracting firms over the past two years to complement our product and service offering in various markets.”
The main reason behind these acquisitions is that manufacturers want to provide total service to its customers. ESCOs are acquiring contracting and manufacturing firms for the same reason: to provide customers with a one-stop shopping experience. Mega-contracting and engineering firms are also emerging, providing myriad design-build services. This often leaves the small independent firm out of the loop.
The Future Role of the Consulting EngineerMark Biro, P.E., of Biro and Associates (Bethlehem, PA), is certainly aware of what’s happening in the industry, but he’s not too concerned that all the mergers will affect his own livelihood — yet. His company works primarily in the school market, in the traditional design-bid-build mode. Biro feels that this will have to change within the next decade, as schools demand design-build services.
“As a small independent working primarily for public entities, I think we have another 10 years or so. Then I think the tide is going to turn at the state level. Construction managers are lobbying hard at the state level for design-build. Eventually we’ll see that filter down to the school level. School boards are going to start asking why they should go through the hassle of design-bid-build, if they can get somebody to lock in at an attractive number early on,” says Biro.
Biro believes that eventually his company will have to partner with a larger entity, such as a contracting firm or an ESCO, if they want to stay in business. He adds that they may even be acquired by one of those entities, provided it’s a “sweetheart deal.” The main reason why he would choose to sell to another entity really comes down to cash flow, he says. “I think if we go through too many years where there’s a tough cash flow, and we have to scream and holler for money, I can see at that point welcoming being bought out. Otherwise, I much prefer the position of independent consultant.”
Right now, Biro sees ESCOs and some manufacturers — particularly the “temperature control people” — as a “real, honest-to-God” threat to his business. “They’re all hitting the school market very, very hard with their financing and being able to retrofit projects. And then there’s performance contracting. They have the money and the ability to finance, and they can do the whole thing for a school. We can’t compete with the financing, but we can offer 45 years of engineering experience.”
Eileen Duignan-Woods, P.E., E.D.W. Associates Inc. (Cornelius, NC), is one who believes that the days of the independent consulting engineer are definitely numbered. “[Independent engineering firms] will be bought up and put out of business. Unicom in Chicago just purchased a major mechanical contractor, and I know of other utilities that have ‘bought’ up engineering firm personnel with no announcement or fanfare.” She believes that consulting engineers have not faced the harsh reality that their world is changing and that they face extinction. “Engineers live in a dream world. They have allowed the industry to become a commodity. They always claim to have the grateful customers, scads of backlog, ‘able to get more work for being such good engineers’ (sounds a little like ‘able to leap tall buildings….’). Very quietly, these people are being bought up. No ones even knows about it publicly.”
Bill Goodman, current president of ASHRAE, also sees the world changing for the consulting and specifying engineer. “We’re seeing the merger of contractors, and these large contracting companies are doing design-build work. They’re hired directly by the owner, and the contractor puts together the design team. We’ve gotten away from the traditional way of building buildings. The role of the consulting engineer or the specifying engineer is being diminished due to this process.”
The end result will be a handful of contracting firms and a handful of consulting engineering firms — large firms — that will be doing all the work, says Goodman. “The small firms and some of the small manufacturers are probably going to suffer because of this. Certainly, their future is in doubt, and it’s going to be tough to survive.”
Most agree that engineers will have to align themselves with, if not be incorporated into, the large contracting firms if they want to survive. It’s an ironic twist that the engineer may now be working for the contractor. As Goodman notes, it used to be that the architect and the engineer would be the policemen of a project, but now the contractor has become the policeman.
Like Duignan-Woods, Goodman is concerned that engineers are not taking the proper steps to prepare themselves for the imminent change in the way they do business. “Right now the economy is good and everyone is busy, so they’ve got their heads in the sand. When the economy hits a dip, everybody’s going to wake up and see what’s already happened to them,” says Goodman.
Other Worlds CrumblingIt’s not just the consulting engineers who will be affected by the “mega” corporations — facilities engineers are also facing big changes. Greil notes that every large company he knows of is getting rid of its engineering staff and going to contractors, outside consultants, or outside service firms. “I don’t know of anybody right now who’s building an internal staff of any size — that goes for universities, hospitals, everybody. They say it’s not their core business, and they want to get out of it. Instead, they want to buy it.”
There are many all-service facility management firms already available to service all kinds of buildings and customers. Greil notes that these are literally multibillion-dollar-a-year businesses that are well hidden. “It’s very quiet. Nobody knows how large they are right now,” he adds.
The future of facilities engineers is that most will no longer work for any one particular building. Instead, they will be working for service companies, which will contract with many different customers. There are pros and cons to that scenario. On the “pro” side, if an engineer is conscientious and concerned about the safety and environment of the people he’s serving, there shouldn’t be any disruption in the way a facility operates.
On the “con” side, it may be a different person out servicing a building’s equipment each time: It’s no longer one or two people who know everything about how the building operates. That’s similar to visiting a group of doctors and never seeing the same doctor twice. You hope that all your notes are passed from one doctor to the next, so that you’re getting the best possible care. In addition, it may be up for debate as to whether an outside firm will have a building’s best interests at heart.
For the facilities engineers who are left, life will become tougher, says Greil, mainly because they’re going to have to keep defending their positions to the “higher-ups” who are pushing to outsource engineering departments. In addition, he believes that huge corporations — whether they’re manufacturers or contracting firms or service firms — do not provide the same kind of expertise that smaller, local companies can.
“It’s very easy to compare several contracts’ bottom lines on price and then at the same time you realize that the technical specifications are so weak, or the ability of the lowest bidder is so weak that you’ll never get the service out of them.”
Greil says another market segment that is concerned about the hvacr industry shake-up is the wholesaler. Between the Internet opening up as a prime supplier and all the mergers and acquisitions causing wholesalers to lose their regions or be dropped as suppliers in some cases, their future is shaky. “I think there’s a lot of pressure on the wholesalers,” says Greil. “Maybe some will survive when this is all over. If they do, they’re not going to survive like they used to.”
York’s Pokelwaldt notes that today there is still an important role for the wholesaler, but that may change in the next 10 years. “I suppose that with the new manufacturing methods, perhaps the wholesaler’s role will diminish. But, somebody has to pick up those services. Perhaps as contractors or dealers roll-up and become much bigger, maybe they will do that themselves and thereby eliminate one step. I think that’s a possibility.”
What Lies AheadNobody seems to agree on what the hvacr industry will look like in another 10 years. Duignan-Woods believes that we’ll see commodity products and systems lacking innovation. “Innovation may eventually come from overseas, along with research and development, which may come through our present ‘big companies’ until they start doing the R&D. Over here, we will be buying it overseas,” she says. Carrier’s Lord disagrees, saying that the hvac industry will be bigger and better than ever in 10 years. “The industry has been ripe for change for many years, and it’s finally starting to happen. I think we’ll continue to see dynamic changes that will bring about improved technological advancements in the areas of energy efficiency, reliability, indoor air quality, and environmentally responsible improvements in product and process.”
There are also those of the opinion that the “goings-on” in the hvacr world are cyclical. Before World War II, consulting engineers were virtually nonexistent, as the manufacturers performed most system designs. After World War II, consulting engineers popped up everywhere in the post-war expansion. Now we may be back to where we were before World War II, with a few big manufacturers providing most of the services. This time they’ll be joined by ESCOs performing the same kinds of activities.
In time, the industry may welcome back the small independent consulting engineer with open arms — especially as some grow dissatisfied with the more impersonal service that larger corporations usually offer. In addition, there’s also the possibility of a backlash against the mega-companies; just look at Microsoft’s woes.
But right now the pendulum is definitely swinging away from small independent firms of any type, and for the foreseeable future, bigger will be considered to be better. For the small independent firms who make it through the next 10 years, our hats are off to you. You’re in for a bumpy ride. ES