Consolidation Round 2: The Age of Realism

As we head into 2006 during a strong business cycle, talk of a new round of rental industry consolidation is in the air. There was talk recently of a potential merger between two Top 10 rental companies. It didn't happen — at least not yet — but I'm sure it's not the last we've heard of such possibilities.

A recent Standard & Poor's report predicts a surge in merger and acquisition activity on a worldwide basis in 2006. The report predicts that a “deluge of private-equity money into many industries and sectors” will add to M&A activity.

After a period of interest in equipment rental and construction markets in general, the investment community overall lost interest in the early 2000s, especially in favor of high-tech industries. The troubles a few national rental companies faced contributed to the bloom coming off the rose in the eyes of sometimes-fickle investors. Now that construction is on an up cycle, investors seem to be viewing the rental market with favor once again. The investment of more than $500 million into Neff Corp. earlier this year was certainly a favorable sign.

While continuing consolidation in the banking industry may have led banking institutions in search of larger game, smaller investment firms continue to show interest in the rental market. The recent entry of FocalPoint Partners, based in Los Angeles, is an example of this [see Industry News]. Led by an experienced group of investment banking professionals, FocalPoint is interested in buying and selling companies and helping entrepreneurs raise money for acquisitions, expansions and other areas. With a particular, although not exclusive, interest in mid-market companies with revenues between $20 million and $200 million, FocalPoint is diversifying among a number of industries and partnering with experts in particular segments. Its association with rental industry veteran Ira Mendelsohn — who has at least three decades of experience in mergers, acquisitions, financing and management in the rental market — makes them an immediate impact player that will be likely to stimulate M&A activity.

Gary Stansberry, whose company Hageman, Stansberry & Associates has continued to broker about a dozen deals a year ever since the late 1990s, has noticed a difference in 2005. He says that while in previous years his company would have to work hard to find prospects and the right fit to acquire a particular business, in 2005 his company was able to find multiple serious prospects for every client, including national and regional firms looking to expand their footprints. In 2005, we saw United Rentals open about 35 branches and Sunbelt Rentals expand in nearly a dozen states, including acquisitions of portions of national company RentX and Southern California regional company Northridge Equipment Rentals.

Before you get too excited thinking about the huge multiples you will get for your company, keep in mind some significant differences between the current environment and the rapid consolidation frenzy of the late 1990s. At that time, several national rental companies were attempting to establish their footprint nationally and paid what many people now agree were unrealistic multiples to enter certain markets, especially to acquire platform companies that would give them an immediate strong market share in an area. The Standard & Poor's report, Stansberry, Mendelsohn and others interviewed by RER all agree that while companies are likely to pay fair prices for companies, there will not be the expansion frenzy there was then. Buyers will look to make deals that make sense. They will pay fair prices for well-managed companies with late-model equipment in good condition. They will pay fair prices for strong management personnel that will remain. They will pay fair prices for good facilities in strategic locations. And they will buy to fill certain strategic needs. They won't buy just anybody to expand for expansion's sake.

It seemed, in the late 1990s, that capital investors suddenly became infatuated with a new discovery — the equipment rental market. When they discovered this industry was not the magic key to massive windfalls, they abandoned it in droves. Now once again equipment rental and construction in general is back in vogue, but under far more realistic conditions. In other words, while capital might be more available than it was over the past few years, it is available on a more limited, controlled and realistic basis.

So if you are looking to sell, or looking for investment capital to expand and grow your business, now is probably the best time in quite a while. But if your expectations are unrealistic, you'll be disappointed. Expect value for value.

That's the way it should be.

TAGS: Ar Features
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