Valve Growth Strategy Options

Thirty-one companies with revenues of more than USD $500 million in the Air, Water, Energy (AWE) market are expanding through acquisitions.

It is important that valve companies address the surge in acquisitions and that they do so using the approach that best optimizes their opportunities for growth.

 By Bob McIlvaine, President & Founder – The McIlvaine Company

As there has been a steady rise in the number of large and small acquisi­tions taking place in the industrial sec­tor, valve companies need to address the surge in acquisitions. While there are several ways that these can be ad­dressed, it is best to first consider if entering this market will be beneficial to the company. There are three ques­tions that should be asked:

1. Should the company make acquisitions?
2. Should the company be acquired?
3. How will acquisitions change the competitive landscape?

A Look at the Market

31 of the largest AWE companies have been listed to provide an over of the current market, see Figure 1. On aver­age the 31 AWE companies have rev­enues of over $1 billion per year. Their sales into adjacent markets are even larger. These companies are challenged to choose from hundreds of industry/ product niches for the next investment.

There are three ways to make the ac­quisition choice.

1. Opportunistic: the company is notified that a candidate is available.
2. Selective: An investigation shows that a particular company would be a great fit.
3. Strategic: All the various options are continuously assessed.

Few would disagree that the program­matic option is the most promising. The question is whether it can be achieved at a reasonable cost.

The programmatic route can be cost-effectively pursued using the Strate­gic Internet of Wisdom (SIOW). The Internet of Things (IOT) has already proven how effective it can be in in­dustrial applications, and many agree that SIOW has the same potential. The opportunity can be viewed as a global orchard of fruit trees. The challenge is to identify those with the most, and lowest-hanging fruit. The lowest-hang­ing fruit has the highest Earnings be­fore interest, taxes, depreciation, and amortization (EBITDA).

Supplying additional complementary products can increase EBITDA. Some valve companies are achieving 30% EBITDA while the average is only 15%.

Fruit Tree Opportunities

The best way to explain this concept is with an example. If company A makes analyzers for the water industry and it expands into complete aeration sys­tems for aquaculture, what is the next best fit? The company buys valves for its aeration systems. Many of its ana­lyzer customers use valves. About 40% of its revenue is therefore in the AWE market, while 60% is in other ar­eas such as laboratory equipment for schools.

Each possible opportunity can be viewed as a fruit tree. The options for expansion into other industries are displayed in the circular path. The op­tions for new products are pursued in the radial paths, see Figure 2.

Ongoing Market Examples

With the multibillion-dollar purchase of the Tyco valves from Pentair Emerson became the world’s largest valve man­ufacturer. With Fisher control valves and many measurements and control solutions Emerson moved into isola­tion valves. This is a synergistic combi­nation. In fact, the recent initiatives to acuate isolation valves and make them part of Solutions provide some addi­tional synergy.

Atlas Copco and Ingersoll Rand have recently acquired valve companies to complement their compressor prod­ucts. Alfa Laval and GEA manufacture valves as part of their systems offer­ings to the food and pharmaceutical industries.

Baker Hughes is a major valve suppli­er for energy and power applications. The valve operations originated at Dresser which in turn purchased inde­pendent valve companies. GE bought Dresser as well as Baker Hughes. In a divestiture, Baker Hughes acquired the valve group.

Final Thoughts

To be effective, the SIOW has to be continually updated. When the Gulf oil spill occurred, McIlvaine immediately contacted the O2 suppliers, NASA and BP. McIlvaine then used SIOW as the basis for a series of webinars on the best analyzer to use on the underwater drones which would track the trajec­tory of the oil spill.

The use of the SIOW has already been proven in the AWE Market. Its power in the AWE and Adjacencies market is also being demonstrated.

References:

1. Industrial Valves: World Market published by the McIlvaine Company
2. AWE Markets published by the McIlvaine Company