The Covid-19 recession and the AVI-SPL/Whitlock merger will drive more M&A this year. Tim Kridel investigates the role of market trends, private equity and more.
April was one for the pro AV history books.
AVI-SPL and Whitlock completed their merger on April 7, creating the world’s largest integrator. Nine days later,
Verizon Business announced it was buying BlueJeans Network.
More to come? The odds look good. For example, the AVI-SPL/Whitlock merger could give other integrators another reason to consider M&A as a way to survive and thrive—especially amid the coronavirus contraction.
“It doesn’t help the typical medium to large enterprise to have both AVI-SPL and Whitlock banging on their door saying, ‘Buy from us,’” says Ira M. Weinstein, Recon Research founder and managing partner. “Putting those two together is a very obvious merger in terms of synergy and efficiency and footprint. We’re going to see more of that.”
Private equity played matchmaker in the AVI-SPL/Whitlock merger. Expect more of that, too.
“We have seen a very noticeable increase in private equity interest and activity in the pro AV and pro audio markets in the last couple of years,” says Ethan Jacks, MediaBridge Capital Advisors managing partner. “Some PEs have commented that the space has been somewhat overlooked in the past and as a result there are some interesting opportunities. PEs are, as always, looking for future growth opportunity, platform building potential, solid market positions and good IP, among other things.”
Is bigger really better?
A variety of business and marketplace factors motivate M&A, including a quest for scale, purchasing power and more global/regional reach in the case of integrators. Vendors sometimes use acquisitions as an alternative to R&D.
“Our firm, MediaBridge Capital Advisors, was proud to represent SVSI and X20 in their M&A transactions with Harman/AMX and Barco, respectively,” says John Bowen, managing partner. “These deals are good examples of when top-tier operating companies use a ‘make vs. buy’ decision analysis and elect to acquire smaller technology-driven companies that address strategic product requirements. In these cases, it is not unusual for the buyer to value the target company at the higher end of the valuation range.”
“Two top reasons I would highlight are adding capabilities, like Spinitar adding Drake Systems Group to add the healthcare market, and to meet the interconnected, global nature of the economy at large,” says Peter Hansen, AVIXA economic analyst. “Huge, multinational companies often find it easier to work with one single partner for multiple AV integration projects across borders and across capability types.
“Size can be an advantage when it means you can install interconnected systems to the same standards at the same time all over. And if you can help out on their corporate events too, even better.”
Even so, research suggests there’s still a place both for smaller integrators and the consortiums, such as PSNI, that they leverage to go after multinational enterprises.
“It’s easy to be afraid that the rise of large integrators and such will negate the need for smaller companies and their cooperative groups,” Hansen says. “We’ve looked at end user preferences carefully, and the data strongly suggest small AV companies will continue to prosper—at least once global health and the economy recover.
“End users tell us that things like customer service and customisation are often more important than factors like cost, which keeps the playing field level across company sizes. End users also report turning down bids because they think the bidder is too large for the project. Smaller companies—as long as they stay agile and smart—will continue to have a major role in the AV world.”
But some of those smaller firms believe that they need to get bigger.
Jeff Irvin, Spinitar principal, says: “As the big get bigger, it really motivates me to get larger because I have to be able to remain relevant and be able to compete price-wise. The bigger players’ discount schedule looks a lot different than mine. So I have to get bigger. There’s a motivation for me to grow.”
For decades, the integrator sector’s fragmented, family owned nature has fuelled speculation that a big roll-up was inevitable. But that never happened, and even the Covid-19 recession might not be enough to break tradition.
“There have a been a few rollups in our industry,” Irvin says. “Normally those don’t work.
“If anyone ever invested in our company, they most likely would be a strategic investor. I think I’d be most comfortable with a strategic investor because our company could be a platform for another company wanting to get into our industry, whether it’s an electrical contractor, an IT services firm or a furniture company that wants to own more of the room.”
Consortiums such as PSNI—which Spinitar is a member of—is another way for smaller integrators to expand internationally rather than using acquisitions to go abroad.
“I can go to my customers and say, ‘I can do work for you virtually wherever you have an office,’” Irvin says. “That allows me to show as many pins in the map as an AVI-SPL. Actually, I can show more. It’s pretty powerful stuff.”
Outsiders come calling
Like IT firms and electrical contractors buying AV integrators, Verizon’s acquisition of BlueJeans is an example of outsiders using M&A to expand into pro AV.
“This was an opportunistic move by Verizon,” says Recon’s Weinstein. “I think it was wise one because Verizon has been in the videoconferencing industry for years. They just never had their own offering.
“They’ve never been able to add the full value of their footprint, IP and resources. They were reselling others. I think they did a fine job supporting their clients, but that’s very different from having a Verizon service that Verizon can enhance through both business and technology innovation.”
BlueJeans was a good fit because it could leverage Verizon’s connections.
“BlueJeans had a platform, but a limited customer base,” Weinstein says. “They didn’t have enough access to C-level executives and decision-makers. It’s a nice partnership in that regard.”
Verizon could provide a second type of connection: 5G. The company declined an interview, but one possibility is bundling BlueJeans with 5G connectivity to support the growing ranks of telecommuters. That way, the quality of the collaboration experience wouldn’t be at the mercy of another provider’s wired or wireless network. Verizon also would get additional revenue from providing connectivity.
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“As the intention was to leverage Verizon’s 5G network capabilities by expanding long-term into high growth areas such as telemedicine, distance learning and field service work, the black-swan event of Covid-19 is a serious accelerator to these efforts,” says MediaBridge’s Bowen. “Even when the virus becomes less of an issue, it will be hard to put this cat back into the bag. Companies will continue to utilise these capabilities, if nothing else, as an augmentation or backup plan.”
Microsoft and Apple are two more outsiders whose names often come up when M&A is discussed.
“It’s challenging to figure out who they would pick up,” Weinstein says. “For them to do a pickup, there’d have to be some specific strategic value to it.
“Often companies come to us and say: ‘We’ve got money. We want to acquire.’ The first question I ask is: ‘What are you trying to acquire? Customers? Footprint? Expertise? Product? Other?’ Often they don’t have an answer.”
Apple seems like an even longer shot.
“They’re a consumer brand that’s trying to get into the enterprise,” says Jim Kelly, Recon Research analyst/consultant. “When they stumble in the enterprise, they stumble fairly big. The way the devices are updated. The way their apps are updated. That just gets in the way of the enterprise.”
Covid-19’s winners and losers
Covid-19 could also drive distress sales by firms that don’t have enough cash to ride out the downturn.
“The Covid-19 crisis is obviously creating winners and losers,” says Courtney Spencer, MediaBridge Capital Advisors managing partner. “While manufacturers that make products that are associated with media and live event production are being hurt, companies that enable or enhance virtual events, teleconferencing and working at home are generally doing well and struggle to keep products in inventory.
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“We have not detected signs of distress sales, but these could ramp up as the crisis continues. We expect seller expectation to be more reasonable in this environment. Buyers are looking for solid companies at a reasonable price, but we can also see them holding out for better prices if the business environment worsens.”
For the most part, it’s a buyer’s market.
“Recessions generally cause a major drop in the total volume of money spent on mergers and acquisitions,” says AVIXA’s Hansen. “This happens because companies are worth less and because less capital is available to finance major loans.
“However, recessions can be a good time to buy. Companies with sufficient capital have less competition and may be able to find bargains among companies in industries who are temporarily repressed like live events. In total, I don’t think you will see as many blockbuster mergers over the next 12 months, but you’ll still see a stream of smaller deals.”
Buyers also will be watching to see whether any of Covid-19’s changes appear to be permanent. For example, businesses in
an April Gartner survey had at least 81% of their employees working remotely due to the pandemic. After the quarantines end, they expect to have 36% more telecommuters than before the pandemic.
“There are two, very distinct groups,” says Daniel Newman, Futurum Research principal analyst. “One is enablers of companies working from home through deployments, managed networks, cloud, hosting. The other is the more construction-oriented organisations that deploy specialised spaces.
“I think those [latter] companies are going to be in a world of trouble coming out of this. They’re going to be potential acquisition targets. But they also could be left for dead at some point. Even AVI-SPL/Whitlock, I’d be very concerned about how much of their income comes from services and managed services that don’t require workers on premise.
“The service providers [such as] 8x8, Zoom, Pexip, all are a very exciting space to be in. Their solutions don’t care where you work.”
Integrators will have to quickly pivot to software and services if they haven’t already.
“If you’re deploying scaled and managed video solutions, e-learning tools and streaming, you’ve got business to grow,” Newman says. “But if you’re running the cable and mounting the projectors, you might be looking at your headstone right now.”
Bottom line: Pro AV will rebound, just as it did in previous recessions, such as 2008.
“The good news is that long term, the tides will rise in this entire space,” Weinstein says. “Everybody is discovering the power of video. Post-Covid, when people are in the office, they’re going to use the meeting rooms. So, a year and half from now, the AV industry will likely be smiling as business rolls in.”