Loren M. Smith 2017-11-07 12:01:03
by: Loren M. Smith, CEO Blue Valley Capital LLC 211 South Ninth Marysville, KS 66508, USA email@example.com www.bluevalleycapital.com www.linkedin.com/in/lorensmith Wire Harness Business & Strategy I can understand why some recent transactions have prompted friends in our business to ask me if I think the wire harness industry is consolidating. Here are my observations. First, I believe the more aggressive pursuit of deals we are witnessing has much more to do with private equity groups taking advantage of low-interest rates and having an abundance of cash than with any dynamics within our industry. A good number of private equity groups are in the hunt now, and our industry is one of many attractive targets. Second, many larger harness companies want to expand, and acquiring smaller harness companies can be a more cost-effective and reliable avenue to growth than attempting to increase market share. So while I acknowledge that these two factors are spurring acquisition frequency, I believe they are more than offset by four factors preventing industry consolidation: • Preferred deal size. Private equity firms and large harness companies are customarily not interested in companies below their minimum EBITDA requirement, and the vast majority of wire harness companies fall below that threshold. This reality mitigates the likelihood of any spike in industry consolidation. • Small-niche lifestyle. Regional owners are seldom attracted to out-of-the-blue selling opportunities. These owners are often enjoying a good living and the security afforded by comfortable interdependence with their customers. When such owners do look to sell, that decision is usually triggered by a life change such as a move toward retirement. • Ease of cost savings. Historically, a quest for cost cutting has been a major driver in industry consolidation, so large harness operations might result from the pursuit of an economy of scale. However, today’s information technology and automated equipment are enabling many small harness companies, by virtue of their agility, to contain costs as effectively as their much larger competitors. • The relative dysfunction of many large organizations. Even well-run large organizations are challenged with communication and other issues that can undermine excellent performance. Over the years I’ve seen a number of larger companies acquire a smaller company, only to see that business then scale back to overcome performance problems. Moreover, although many users of wire harnesses require a certain size threshold of their suppliers (i.e., wanting to deal only with suppliers bigger than x), a similar number of harness users prefer to deal with smaller companies. A key reason is users’ awareness of imperfections in their production control systems or weaknesses in planning capability. They recognize that smaller wire harness suppliers, being more nimble and flexible, can handle these challenges and provide customers with an adaptive service level not available from larger harness companies. Yes, we now have fewer medium-size harness companies–– those annually generating US$30 million to US$100 million––but current data does not reflect an overall drop in the number of wire harness companies from five or 10 years ago. North America is still home to well over 1000 wire harness companies, and I do not expect to see that number change appreciably in the near future. www.bluevalleycapital.com Author & Company Profile...Loren M Smith is CEO and sole shareholder of Blue Valley Capital LLC, a position he has held since 2001. From 1976 to 2001, he was CEO and majority shareholder of MWC, a manufacturer of electrical wire harness assemblies. During that period, by acquiring and integrating a number of mid-market wire harness manufacturers, MWC became the world’s leading supplier of electrical wire harness assemblies serving the construction equipment industry. Loren eventually sold MWC to a private equity group. As CEO of MWC and Blue Valley Capital, Loren has spearheaded the sale and purchase of dozens of midmarket (US$2M-US$200M) manufacturing companies. Early in his career, he was with Texas Instruments (TI), rising to general manager of TI’s connector division. Smith earned a BS degree from Miami University in Oxford, OH, USA, and an MBA from Northeastern University in Boston, MA, USA. www.bluevalleycapital.com
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