Just a few years ago, electrical construction consolidators sprang to life in a bizarre manner. Buying companies hand-over-fist and paying way too much, they added debt as if tomorrow would never come.
But tomorrow is now here; for the most part, the consolidators are gone. What comes when dreams vanish and nightmares are revealed as 100 percent fluff?
This year has seen the unwinding of the 1998-2000 contractor acquisition mania. There’s more than a “bubble” popping here; there is the aftermath to consider—what happened has shaped the present and future environment in which contractors compete. Almost all who sought to build huge national contracting firms via acquisition (including utilities) have gone south, their dreams vaporized.
In the future, similar times might revisit electrical contracting; perhaps next time, people might maintain some perspective.
In many cases, the “roll-up” trend wrought wholesale wreckage. As seen in the Wall Street bust, that is often the legacy of stock market-driven pursuits. Bankruptcy courts have been busy. Owners of equity or debt of these companies (even those still in business) have regrets.
Our aftermath includes—for some—new, more modest horizons. Ironically, many of these less grandiose “new” dreamers are the same people who sold out to the roll-ups in the first place. Back in electrical contracting, these executives (in many cases) run substantially the same companies they sold just a few years ago.
How did this round-trip happen? The roll-up megatrend—financial engineers using public markets to acquire numerous private companies in industries described as “fragmented”—came to construction in the mid-1990s. At the same time, electric utilities in many states were deregulated; some elected to join the roll-up fun by starting construction and/or service subsidiaries via acquisition. Mechanical contracting, the first segment attacked (in 1996), attracted attention earlier thanks to higher levels of recurring revenue (more service work) in their business.
But the money men got around to the electrical niche. The prime example: Jonathan Ledecky of the Washington, D.C., area raised more than $500 million cash in what essentially was a “blind pool” in late 1997, via an initial public offering of stock.
Ledecky created Building One Services (BOSS was its stock symbol) and began buying electrical and mechanical contractors. Contractors were sold for a combination of cash and BOSS stock; tax advisors typically told sellers to take more in stock than cash (i.e., 45 percent cash, 55 percent stock).
With the company-building effort not yet complete, Ledecky (and others) left the business, via a financial operation in which BOSS bought back their stock, taking on more debt. What was the result? Some fraction of the cash helped make Ledecky an owner of the Washington Capitals hockey team.
What about BOSS? After competing with each other to buy prime-quality independent electrical and mechanical contractors, Building One Services merged with Group Maintenance America Corp. “Group MAC” had started rolling up mechanical contractors in 1996. Encompass Services was the name hung on the new entity after the February 2000 merger.
Like a meteor, Encompass briefly lit up the skies. With more than $4 billion in annual sales in electrical/mechanical and janitorial contracting, it talked about providing building owners with one-stop “facility management services.” This was similar to the strategy of EMCOR Group, which had been and still is the nation’s largest electrical/mechanical contractor.
Suddenly, there was a company that seemed to be a bit larger (in sales) than EMCOR pursuing the same idea. In the blink of an eye, there were $4 billion twins at the top of the industry. Nightmares proliferated among large independents who had not sold out and electrical manufacturers and distributors worried about further concentration of purchasing power.
But meteors are described as shooting stars. Encompass became bankrupt in 2003. Why? Among other reasons, the company had an enormous amount of debt (some of it left over from that Ledecky buyout). Intangible assets (goodwill resulting from the many acquisitions) made its balance sheet asset light. The huge post-1999 reduction in data center and telecomm work also hurt Encompass.
Electrical contracting companies acquired by Building One and Group Maintenance were sold off. Buyers typically included former owners or groups of managers—the folks who had sold out in1998-2000.
Why were these buyers preferred? Most successful private electrical contracting companies are asset light. They own trucks, testing equipment and perhaps some lifts and, occasionally, the real estate on which the headquarters office stands. But a contracting company’s value resides in its top people and work force—and the relation those humans create with customers
Note that the Encompass-sold contractors would have been worth more if former owners and managers stayed with the companies when sold off. But we live in a free country. Former owners/managers had a clear choice with the Encompass break-up:
• Stay as employees with a sold-off unit and help a bankrupt entity pay off a higher percentage of its debt; or
• Make an offer for the unit being sold off and, if that offer were
not met, leave. It proved impossible for Encompass to sell such a company without its cadre of leaders.
Same as the old boss
Our aftermath, then, includes a significant number of large, independent, privately owned electrical contractors—similar companies to those operating in 1997, with similar or the same owners. Key differences:
1. These companies have come back to life with little or no debt.
2. They are well-capitalized. Most contractors buying back their companies have not revealed terms. But in Texas, a contractor who sold a company for $100 million in 1998 told a local newspaper he bought it back for $7 million.
3. These former independents are better managers, thanks to the experience of being owned by a larger, public company. The prime areas of improvement cited by many: accounting and financial operations.
After the break-up, Encompass emerged as a shadow of its former self: A 23-site, nine-state residential HVAC company. That disappeared, too, acquired by a private concern. EC
SALIMANDO is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at firstname.lastname@example.org.