PPB May 2016

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64 • PPB • MAY 2016 THINK
WHY THE RISE IN ACQUISITIONS?
defines a con-
solidated industry as “a commercial struc-
ture where a relatively low number of com-
panies control a rather large market share
of the overall output or sales for a particu-
lar product or product type.”
New industries start out fragmented
and they consolidate as they mature. A
Harvard Business Review study concluded
that once an industry forms or is deregu-
lated, it takes about 25 years on average to
move through four stages of consolidation:
1) Opening (which usually begins with a
monopoly); 2) Scale (buying up competi-
tors and forming empires); 3) Focus
(expanding the core business and aggres-
sively trying to outgrow the competition);
and 4) Balance and alliance (at this stage
the top few companies may control 70 to
90 percent of the market).
The study suggests that every industry
will go through these four stages—or dis-
appear. The promotional products industry
has been around for more than 100 years.
Marc Simon, CEO of Sterling,
Illinois-based distributor HALO Branded
Solutions, refers to an industry’s lifecycle
based on a study conducted by Emory
University in the late ’90s that reviewed
countless industries from automobiles to
soap to beer and from heavy industries to
service businesses. The study found that
once an industry matured, there was one
dominant player with as much as 40-50
percent market share, a second place partic-
ipant with 20-25 percent share and a third
major participant with 10 percent or more.
The balance was then comprised of a num-
ber of small, niche players—each nimble
and with appeal to a subset of the industry,
and comprising less than five percent of the
market. The study argued that those com-
panies with between five and 10 percent
market share are in “the ditch”—they are
too small to compete with the large players
and not nimble or specialized enough to
compete with the small players. The report
showed these companies are most at risk of
perishing.
In a PPB article last summer which
addressed the industry’s relatively flat 2014
sales, Gemline CEO Jonathan Isaacson
said, “For a long time now it has been
obvious that the industry is mature. As an
industry matures, it doesn’t mean that indi-
vidual companies cannot grow, because
they can.”
One way companies can grow is through
acquisitions, but the reasons for acquisitions
are far more specific. In two words, market
share. The increase in industry acquisitions
in recent years is the result of a combination
of investments needed (production, IT and
compliance), and margin pressure, says
Emmanuel Bruno, vice president/general
manager North America, for Tampa-based
BIC Graphic. “Currently no distributor has a
market share above five percent and only one
supplier is above five percent. Both are look-
ing for ways to grow share, and acquisitions
can be a way to do it.”
Another reason for increased industry
activity, especially on the supplier side, is
cost and increased efficiencies through
acquisitions. “When Company A and
Company B can tie their back-end opera-
tions together, they can trim costs and
drive value to their organizations,” says
Mark Graham, president of Toronto-based
promotional products software company,
commonsku, and distributor RIGHT-
SLEEVE.
Another factor to consider, says
Graham, is the rise of motivated outside
investors with private equity funds who put
together financial transactions that will
increase the efficiency of one or both com-
panies. “Professional investors are looking
for returns and they are seeking out oppor-
tunities within our industry.” The third rea-
son he describes is sameness, commoditiza-
tion and lack of differentiation in the
industry. “It can be difficult to compete if
you are a me-too supplier and especially if
you are a smaller supplier because you can’t
get the scale to run your business efficiently
and leanly.” He believes one way smaller
suppliers can continue to grow and com-
pete is if they are part of a larger entity.
The solution? Acquire or be acquired.
It’s a scenario David Woods, MAS,
president and CEO of Neenah,
Wisconsin-based distributor AIA
Corporation, agrees with, adding that it’s
happening for both suppliers and distribu-
tors. “As the cost of doing business con-
stantly rises, major investments in technol-
ogy and new services are required to be
competitive,” he says. “Efficiencies come
with scale so there is a natural trend to find
growth through acquisitions.”
Chuck Fandos, CAS, U.S. CEO of
Brand Addition in St. Louis, believes sup-
plier consolidation is driven largely by a fear
of not being competitive, especially with
technology and product safety regulations,
and also by the needs of private equity
owners. “When larger suppliers are owned
by private equity, the owners are looking to
grow the business in the early to mid years
and sell it in three to seven years—and that
drives consolidation too.”
While consolidation on the supplier
side is often driven by the attractiveness of
efficiencies with better tools and better
pricing, there’s still another explanation.
Gary Haley is president of Beacon
Promotions, a supplier that has acquired 11
companies and added numerous product
lines since 2002. He says suppliers are
acquiring other companies chiefly to round
out their product lines. “You can develop a
product line from scratch [such as the cal-
endar line Beacon built] but sometimes it’s