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:
- Should the company make acquisitions?
- Should the company be acquired?
- 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.
- Opportunistic: the company is notified that a candidate is available.
- Selective: An investigation shows that a particular company would be a great fit.
- 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.
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.
- Industrial Valves: World Market published by the McIlvaine Company
- AWE Markets published by the McIlvaine Company