Is bigger better?

Leigh W Sparrow, Publisher

January 28, 2012 - As the New Year gathers pace it looks as though 2012 will be a year of significant activity for the crane, access and telehandler markets. After a few quiet years it is set to generate a great deal of activity in the area of mergers, acquisitions and other corporate changes.

The year has already started off with a bang, with North America’s two largest rental companies agreeing to merge, Netherland based Boels concluding its acquisition of Baurent in Germany along with a couple of smaller ones in Holland and Oshkosh seeing off Carl Icahn’s efforts to force it to sell JLG.

At the same time at least one major Chinese equipment company is trying to acquire all, or part of a European or North American aerial lift manufacturer and may well have already reached one small agreement, if rumours are to be believed.

We seem to be entering a new period where bigger is thought to be best and look set for a new wave of ‘consolidation’ - starting out with the United RSC deal. At the same time in the wider business world a number of companies are failing – not because of slower trading or lower margins – but due to the massive debt and fees they were loaded up with following an acquisition or merger, often by quick buck financial operators that quickly moved on, having filled their pockets with fat fees and commissions.

United has of course built its business on a series of acquisitions, which over time it has successfully integrated – although the road has not always been smooth -and now appears to be using to great effect – leading the market upwards, building some strong revenue and profit momentum. RSC after struggling somewhat, also appears to be moving into very positive territory. Will they be able to continue this progress after or as they are merged?

Both United and RSC already have pretty good national coverage, so there is likely to be quite a lot of depot overlap. If filling blank parts of the map was the driver smaller acquisitions would have been a more effective strategy. The two companies have similar ranges of equipment and not massively different customer bases/profiles – although RSC is likely to contribute more ‘industrial’ customers to the new venture.

Overall this is more about just being bigger – and it will be, the combined revenues of the two amounted to $3.84 billion in 2011 with almost 1,000 locations and 90,000 aerial lifts in its fleet. The challenge will be holding on to all this as locations are closed etc…

While the new business will be big, it will still not have a dominant position in the North American market, with a combined market share of under 15 percent – so it will have plenty of upside potential. It will though be fairly well loaded up with debt so the first few years of the merger could be critical. Any surprise downturn in the first 18 months could cause it to struggle.

Financiers and equity funds generally love mergers and acquisitions for the fees, commissions and share movements that they generate. What should be more important though is whether the deal is good for the ultimate owners/shareholders, along with the employees and customers. It does seem that these considerations are increasingly moving to the fore in Wall Street, with the Oshkosh vote being a positive indicator.

United’s chief executive Michael Kneeland recently said that well run, well capitalised rental companies will consistently outperform others. He is right of course and that’s what it really comes down to. The combination of good management, a motivated workforce and a sufficiently strong financial position to allow the management to focus on what’s right for the business, is a timeless recipe for success. The fact is though that the larger the business is, the harder this can be to achieve.

United currently has a good management team, the price it has paid for RSC seems to be reasonable and it appears to be approaching the merger of the two business in a very solid and structured manner, so if the merger fails, it will not be due to lack of effort, experience or planning . The deal is exciting for sure and given a fair wind from the rental markets this is likely to be a good move for the US rental industry as a whole.

On balance I still think that the merged business will be tough to keep at the top its game over the long term. And wonder whether United might have done better if it had focused on organic growth and smaller acquisitions?

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