News & Resources

Throughout Spring 2023, Alexander Hutton team members attended trade shows of key industries of interest to the firm. We were present at MHEDA (Material Handling Equipment Distributors Association), RIA (Restoration Industry Association), GDC (Game Developers Conference) & DICE (Design Innovate Communicate Entertain), and WQA (Water Quality Association). Below are our reflections on each industry and our observations from the shows.

 

MHEDA - Material Handling

The material handling community is a tight-knit group of industry professionals who care about their fellow MHEDA members. Alexander Hutton was a new participant and sponsor but was familiar with the industry through a number of recent transactions and ongoing engagements. The team deepened their understandings of the materials handling value chain and made new connections within the industry.   

Insights from MHEDA:

• There seems to be a blurring of the value chains within the material handling industry. As an example, several recent transactions have been announced where equipment manufacturers (specifically lift truck manufacturers) are buying systems integrators. Manufacturing requires different competencies than integration, and it will be important for acquirers to be thoughtful and drive successful integration to achieve their target goals.
• The system integration sector is highly fragmented, and private equity firms are driving consolidation. Those integrators with a full suite offering who can respond to the needs of today’s demanding MNC clients are highly coveted. Businesses with strong teams, above average profitability and repeat customers are those that will receive multiple offers when the time comes to sell.
• Like many industries in US today, the material handling industry is “graying.” One MHEDA participant lamented that, “We all know we have to figure something out on transition, but most of our kids aren’t interested in the business.” Successful transitions need to be planned with several advisors at the table, including the business owner’s accountant, attorney, wealth advisor and investment banker. The sooner this planning starts, the better it will be for achieving a high valuation and ensuring continuity of the business. Most buyers want to see the owner stay on as a partner for several years and together pull those levers of growth that drive future enterprise value.

 

RIA - Restoration Services

The restoration industry is going through significant consolidation, but it is in earlier innings than other home services sectors like plumbing and HVAC. Outside of the typical buyers and vendors booths, M&A was a main focus of those who attended the RIA trade show. Every owner of a small to medium-sized business was approached by financial and strategic buyers at a consistent rate.  

Insights from RIA:

• The aging home stock remains a significant tailwind for this industry. The average US home is now over 40 years old, and they are not being replaced quickly enough. This, along with climate change and significant weather patterns, will continue to grow the need for restoration services.
• Restoration companies that are able to provide a full-suite offering, controlling both the restoring and reconstruction of homes and commercial buildings, are at an advantage. These firms own the customer and the project from start to finish. These are different departments, accounting methods and business models which can make it difficult to do correctly.
• Insurance companies rely on third-party administrators (TPAs) to delegate work and to keep their costs low. Most restoration companies are still able to avoid this lower-margin work by getting their projects through other means. TPA work remains a divider in the industry and greatly affects the buyer universe, as it determines a company’s main source of revenue.

 

DICE & GDC - Gaming

DICE is an annual multi-day gathering of video game executives and is host to the annual Entertainment Software Association’s Interactive Achievement Awards. The conference focuses on the business and production aspects of the industry, as well as innovations in design.  The Game Developers Conference (GDC) is an annual conference for video game developers, with attendance of over 28,000 professionals. Mike Ryder, an Alexander Hutton strategic advisor, is a veteran of both shows and attended on behalf of the firm.

Insights from DICE & GDC:

• The most significant topic at both events, but especially at GDC, was the anticipated integration of AI technology, particularly in the area of generative AI. AI is anticipated to impact all aspects of the industry, from content creation to live operations. The enthusiasm for AI overshadowed other areas of innovation such as Web3 and NFT. While it’s too early to know how quickly these impacts will be realized, the disruptive aspects will ultimately be significant.
• Epic / Unreal and Unity were the tentpole exhibits at the GDC Expo, highlighting their continued dominance in the game development pipelines. Both companies are expanding their influence into areas such as the metaverse and AI. The impact of less proprietary development environments lowers the barrier for new teams to succeed.
• Meanwhile, the industry continues to trend towards increased globalization, both in terms of emerging markets and in the competition for development talent.  As the trend of remote work environments persists, the international opportunity for increased outsourcing, co-development, and M&A becomes increasingly attractive.

 

WQA - Water

The WQA trade show is the most comprehensive annual gathering of water treatment professionals in North America. Managing Director James Thompson, former CEO of HaloSource, and Strategic Advisor Guillermo Guzman, founder of H2O International, are both longtime members of WQA and were warmly welcomed. At the show floor, the welcome reception, the Wishing Well International Foundation charity golf event, and the many educational sessions, they were often asked about the exit opportunities available to business owners in the industry. WQA members have felt an atmosphere of consolidation by large, well known strategic acquirers and are curious about their options.   

Insights from WQA:

• Water technologies are notoriously difficult to commercialize.  Long development cycles and highly regulated markets create deep moats around a business. New technologies were previewed, including one that can analyze water quality and report out to an app. Another uses water conditioning to reduce scale formation. Unlike softeners it does not require salt to regenerate and it leaves calcium and magnesium in the water, which are both valuable minerals.  
• There appears to be a few large consolidators in the industry (Culligan, AO Smith, Elby of America, etc.) and little private equity participation.  Given the high multiples that private equities pay for plumbing, HVAC and restoration companies, why not water treatment? A plumber responds to a one-off problem in the home, but water treatment companies service homes on an ongoing basis with new devices and ongoing filter/media replacements. The level of recurring revenue in the industry could mean that an era of private equity consolidation is in store.   

 

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