Consolidation: Trading places
The last two years has seen a significant rise in M&A activity in the AV sector. Paul Milligan looks at the factors behind it and asks if such consolidation is a positive or a negative for the industry.
AV companies have always been bought and sold.
Mergers and acquisition (M&A) activity is nothing new, but the sharp upturn we’ve seen in the last two years has been surprising, both in the numbers of deals, who the buyers are, and the sheer amount of money involved.
If you didn’t know it before, you do now, AV has become big business. But are these deals are a positive for the industry? Are they bringing in new investment and new ideas in to the sector? Or are the deals having a negative impact on proAV? Are they reducing competition? Are we losing unique long-standing AV brands with innovative thinkers in the name of increasing venture capitalists share prices? We asked a selection of companies, who have all been through recent M&A activity, to give their own take on market consolidation.
“In most cases I see it as a positive,” says Jenny Hicks, head of technology at UK-headquartered AV distributor Midwich. “Consolidation from other sectors brings a nervousness. We can’t deny that the IT giants such as Microsoft and Google have the ability, manpower and the wallet to really come after us. From what I’ve seen in the reseller sector, the consolidation we have seen so far has mostly been positive.” The concern Hicks feels is in the recent deals including manufacturers, “If Microsoft was to buy big legacy AV brands, what would that mean for the channel? Its not that we wouldn’t end up with wonderful products, it’s that historically these companies have traditionally offered their own service and support, who take a lot more of that away from the channel and have far vaster operations in comparison to some of the hardware manufacturers on the AV side who need distribution, who need integration. It’s about what those deals would do to the ecosystem.”
Consolidation is not neither positive or negative, its just inevitable says John Thorneycroft, SVP strategy and transformation at global integration group Kinly. “There are two main trends that make it necessary to engage with acquisitions to grow in to a larger company; changing technology and the globalisation of our clients. New collaboration software or new options in configuring control panels enable standardisation around various AV functions which means you get more economy of scale. Consolidation allows us to invest substantially in the development of AV supporting technologies, and that investment is critical to enable us to better serve our customers, and our customers are increasingly demanding that companies (like us) make those investments.”
Martin Tremblay, president and CEO from Canadian AV company Solotech agrees that the global nature of modern clients is driving consolidation to bigger and bigger deals. “If you look at this industry it began in the mid 1970s and a lot of the owners are facing the end and a new breed of management is coming in. All of the clues as to why this industry is consolidating right now are there. There are a lot of companies now owned by big financial companies, and if we look ahead in five years things will be very different.” Solotech’s business involves a systems integration arm but also a rental and staging business, and the two aren’t behaving the same with regards to M&A, as he explains. “On the integration side of things we are really seeing consolidation happen, but on the rental side there are challenges, it takes money to invest, the barrier of entry is pretty high and getting more and more expensive, and that is a challenge for newcomers to the space.”
For Luke Marler-Hausen, sales manager for LED manufacturer Leyard the consolidation is happening because of two forces aligning. “What we have is a lot of small companies with really good skillsets creating a business, as that business grows they have encountered growing pains and the limits as to what those people can do. The bigger companies are looking at how they can add value to their shareholders and looking at how they can grow their business, so there is a natural synergy there.” As time goes on he adds, we will only see more and more consolidation, for the same reasons. “There are lots of people who are reaching the limits of their bank balances. There are some really talented people out there but they are not cash rich. I think we will end up seeing a lot of people say I don’t want to be the managing director, I just wanted to grow my business with cool things.”
To look behind some of the recent M&A deals in the AV sector, we asked the people involved, starting with Kinly, who bought Netherlands-based integrator MK2 Audiovisueel in late 2018. “That acquisition helps us strengthen further in Europe,” said Thorneycroft. “The trend we are seeing is our largest customers are expressing a need for global solutions. The vast majority of global companies use a patchwork of AV companies, and they are starting to move towards a world where they want a more consistent philosophy, and more consistent answer to their AV solutions.” The deal to buy MK2 has seen Kinly, which was itself formed by a merger between Viju and VisionsConnected in early 2018, saw Kinly add a third of its total workforce to the group. Leyard has been busy with M&A, having added Planar to its portfolio in 2015, and then eyevis in mid-2018. The latter deal was driven by market changes in support says Marler-Hausen. “The eyevis acquisition gave us rear projection capability but also helps us improve the service capability we can offer in Europe. The shape of the market is in such a way that dealers are having less and less expertise on specific products so when consultants and end users are asking for projects to be installed they are starting to ask for the manufacturers to get involved in that installation. Now that is a dangerous business for us, because we are in the manufacturing business not in the installation business. So we need to rearrange the company is such a way so that we have a much better service and installation support with project management than we had before.”
Canadian AV company Solotech made a splash in EMEA in December 2018 when it bought UK distributor SSE Audio Group. So is this a concerted move into EMEA from Solotech? “There are more purchases on the way for sure,” says Tremlay. “We are a strong believer in consolidation, we are looking at everything, and we are talking to a lot of people. We are extremely attracted to the UK, there was a period where Brexit made us think a little bit (about the UK) but it won’t stop us continuing to look at companies there. This is a political aspect we believe will be resolved in time. Our interest in the UK is still extremely high.” Tremblay added the group is also looking to add to the ‘4% or 5%’ of its business that is currently based in the Middle East, as it pursues a global expansion strategy.
UK-based distributor Midwich has been busier than most, snapping up distributors in Italy (Prase in Feb 2019), Switzerland (Mobilepro in Jan 2019), France (Perfect Sound in September 2018) Germany (Bauer and Trummer in August 2018) and the Netherlands (Van Domburg in September 2017) all in the last 18 months.
In a short space of time Midwich has gone from being the biggest UK distributor to a truly pan-European distributor of a whole host of different AV technologies. Jenny Hicks outlines the thinking behind the deals; “We make different decision on different areas, the newest acquisitions (Prase, Mobilepro) have got us in to new territories. If we really feel that they are a specialist organisation and they can see that we want to protect that specialism, then we generally move forward with a deal.”
As Tremblay indicated above, this isn’t an industry that has been around hundreds of years, so is this flurry of M&A activity now just a natural progression for what is becoming a maturing sector? Are we now seeing the ‘pro’ side of the proAV sector? “There are all sorts of signs that our market is maturing,” says Hicks. “We have seen very specialist technology categories becoming really commoditised. We are not too far from signage and wireless presentation systems (from becoming commoditised), these used to require a demonstration, a consultative sell, a network specialist to go in and really work out how to implement these technologies at the end user site, and that’s just not the case anymore, more products are coming out that are plug-and-play. These products are becoming as easy to sell as a single projector or display. The M&A we are seeing is the market maturing, it’s our time.”
The growing maturity of the proAV sector is just “a natural thing that happens,” says Georg Thingbo, CTO, Kinly. “Looking back it was impossible to get paid for training. Now we have customers screaming to pay for training because they realise the importance of getting the proper benefits out of their solutions. It not just about learning how to use the tool, its about how to apply it to your workflow, how to apply it to your business, to get ahead. The first wave was getting paid for AV design, you would get paid for the projector and nothing else, everything else was included. Now you are paid for project work, design work, because customers see the value in it. Now we are onto a new level where they will pay for training.”
More money has meant the sector has had to become more professional says Marler-Hausen, but this success comes with a warning. “Some companies have developed to a size where they are attracting the attention of businesses whose sole purpose is to generate turnover and revenue.” The money men are beginning to circle the proAV sector, and we have seen it pointedly in the last 18 months, with Biamp, Hall Research and Mersive all being bought by VC firms. Other manufacturers to have been bought in the last two years includes mega deals for Harman and Polycom, and smaller deals for Onelan, Altia Systems and Atlona.Is this outside interest now inevitable? “What you are starting to see now is the growing importance of AV technology, of having a global footprint and the extremely fragmented nature of the industry, which does make it a fairly obvious candidate for private equity investment,” says Thorneycroft.
“They (VCs) see the light at the end of the tunnel as everything moves over to software, so there is the possibility of pretty rapid growth and scalability that wasn’t possible in the past. Previously you needed a box, and to multiply that by 10 or 100, now we are moving to software. If they can be part of that transition there is probably a lot of money to be made, especially if you are first to the market,” adds Thingbo. The opportunity is clearly there says Hicks, hence the interest. “Where we see companies from completely different sectors buying AV companies it is because they know they are on to a good thing. In audio and technical video areas these type of companies are just as exciting as anything coming out of silicon valley, and probably in this case there is so much press about the growth of meeting rooms and huddle spaces, any VC would be foolish not to consider them as a really good growth opportunity.”
As ever the IT sector isn’t too far away when discussing AV and consolidation. “I think we’ll see a lot of the AV distributors attract the eyes of the big IT distributors, we’ve already seen the Stampede/Exertis deal last year (US distributor Stampede was bought by Exteris parent company DCC in July 2018),” says Marler-Hausen. “There is a lot of money to be made and its only getting bigger, more professional and more technical. It’s like the Cisco and telecoms routers back in the day, you need to know what you are doing to sell in our industry, so the easiest way to do that is to grab the market share.”
Rather than fearing it, consolidation is happening because the industry is lean, innovative and most importantly turning a profit. The final word goes to Tremblay, “I think the financial community is looking at the AV industry in a very different way than it did years ago. AV really is a business now, and AV is extremely important.”