Within the equipment rental industry, consolidation and roll-ups have been pervasive for a few years. Entirely new entities - known by Wall Street as platforms - are now dominant national players, and each has followed a comparable growth scenario: namely, the acquisition of equipment rental companies across the United States and Canada. Within these scenarios, it typically appears that internal savings and the capacity to market more effectively are secondary objectives to flat-out growth.
For smaller, independent companies to compete effectively within this changing and unquestionably more demanding environment, they must consider new growth scenarios, one of which is termed a "mini-niche consolidation."
Mini-niche consolidation can relate to acquisitions within a market segment - light, medium, heavy equipment - or a geographic area such as the Southeast, the Midwest or New York City. Often a mini-niche consolidation in the early stages falls below the radar of the large consolidators, yet these companies collectively can compete with their larger competitors.
A mini-niche consolidation brings together rental companies that are compatible in terms of market segment, products, services and geography. Effectively positioned, the sum of the companies can be greater than their parts. Personnel, products, services and customer base can be meaningfully combined so that 1 + 1 = more than 2.
As smaller players participate in mini-consolidation niches, their motivation for acquisition is usually more regional in nature, corresponding to their knowledge of the markets to be served. And unlike the major consolidator, the platform entities that evolve from mini-niche consolidations can produce substantial internal growth, which can lead to improvements in employee development, systems and marketing.
That is not to say that any combination of market and geographically compatible companies will succeed. Rather, for a mini-niche consolidation to be effective, it must include these elements:
* The local flavor of core companies must be preserved in order to continue to serve customers on a local or market segment basis.
* While one of the platform CEOs must be the "leader," the other CEOs must maintain a reasonable level of autonomy in order to serve their customer base as effectively as ever.
* Stable cash flows and recurring revenue streams, with little reliance on technology or innovation.
* Long-term growth prospects for the products or services being offered; thus, low product or service obsolescence.
* A strong franchise in the communities serviced, with significant potential to further penetrate the market segment or geography; supported by the increased management and marketing capacity and a stronger financial posture.
To evaluate and implement this growth scenario within the increasingly competitive equipment rental market segment, several steps must be taken.
In-depth assessment The initial ingredient required in determining the viability of a mini-niche consolidation is a detailed market and competitive assessment of the segment and geographic region served by the companies being considered as platform entities. In essence, this process encompasses an analysis of the strengths and weaknesses of the entities that compete within the served market.
Too often, a company seeking to establish such a growth plan bases this analysis on its own management's market experience, or it relies on input from its sales force as to how its customer bases would rate competing companies' management, products, services and market penetration. Information culled in this manner is entirely too subjective.
An objective interview within the served market involving customers and competitors is essential. Overlooking this step will come back to haunt any platform entity. In light of this, the ideal way to determine the market's attitude toward competitive companies' strengths and weaknesses is to answer the following questions (posed by any member of management not involved in those market segments or by an outside consultant):
* What end-use market segment(s) are the competitive companies currently serving?
* Who are the principal and potential customers within each market segment and what has been their recent experience with one or more of these competitors?
* How do current and potential customers rate the companies in terms of comparative product and service lines, quality, pricing, delivery history and state of evolving technology?
* How effective is each company's marketing organization? To determine this, ask such questions as: How knowledgeable is the sales force? How often do salespeople contact customers and prospects? How responsive is the organization to inquiries? Is its representation in the market consistent? What form does that representation take (direct sales/representative)?
* Do current and potential customers use multiple product and service sources? If so, do customers use these sources to ensure a degree of security, or to gain specific benefits through multiple competitive offerings? Which factors are the most important to their buying decisions?
* How does each rental company rank against its key competition, considering such factors as organizational structure, internal and external policies and procedures, product/service quality, delivery, sales and marketing coverage, customer support and service, and product pricing?
Know the market Following a thorough market and competitive analysis, it is necessary to characterize both the size and growth prospects of the market segment and prospective platform companies; to define existing and evolving products/services and trends; to assess current and likely new competition; and to indicate the expected response of existing competitors to the platform's expansion into the marketplace.
The analysis should focus on the following:
* Size and three- to five-year growth outlook of the market segment(s).
* Product and service requirements, features, and specifications within each market segment.
* The major buying influences of each market segment.
* Breadth of product and service lines required to be successful.
* Competitive situations within each market segment.
* Profitability and ownership structure of current competitors within these market segments.
Initial interviews The interview process of prospective niche companies isn't easy. It requires a serious time commitment from a knowledgeable group of team members, particularly if early interviews reveal the need to probe more deeply. In essence, each interview builds upon prior ones, allowing the interviewer to challenge responses as the results evolve.
The team can conduct the interviews either in person or by telephone. Personal interviews are preferred, however, as they are a means to establish rapport with the interviewees, but telephone interviews are also useful to probe specific questions. And, of course, when polling the marketplace, make sure interview questions include several company name, so that the survey doesn't appear to focus on anyone in particular.
At the end of this assessment, when the interviews with current and potential customers have been completed and the most relevant questions and issues identified, focus should turn to potential platform targets. The most critical element in the entire market assessment process will be the interviews of each of the competitors.
These interviews, by their nature, are two-way discussions, with each party sharing thoughts about market size, growth, competitive positions and distribution channels. Proprietary issues are not the subject of this interplay; each competitor's view of other competitors should dominate these discussions. This step is useful in testing preliminary conclusions regarding possible long-term "partnering" relationships and hypotheses about market size and growth, competitive structure and other issues.
Identification and selection Once the top competitors are evaluated, it is important to review their strengths and weaknesses against each of the other potential platform companies to determine the optimal combination. Only with a thorough understanding of the possible platforms' combined strengths and weaknesses can a series of growth scenarios be developed. The results of these scenarios will identify the prospect(s) that most effectively complements one another for an effective growth scenario.
When the market assessment is completed, select those companies that best control significant, defensible market shares, and that would "fit"-both functionally and culturally-with one another. Next, contact those companies to determine their level of interest in discussing a platform relationship. At this point, openly acknowledge the current depth of understanding of the prospect's market position and operational strengths and weaknesses, based on the earlier assessment.
Growth scenario When the market growth, competitive assessment and platform entities are in place, the next step is development of a growth scenario for the proposed niche consolidation. The key ingredients of the growth scenario are:
1.0 Market and Sales Analysis 1.1 Structure of the Equipment Rental Market
1.2. Target Market Segments
1.3 Product/Service Lines
1.4 Sales & Marketing Expenses
1.5 Sales Trend Analysis
2.0 Operations Analysis Section 2.1 Plant Facility
2.2 Operations Analysis
2.3 Production Personnel & Equipment
2.4 Suppliers
3.0 Financial Analysis Section 3.1 Income Statement Analysis
3.2 Recast Assumptions
3.3 Balance Sheet Analysis
4.0 Growth & Financial Plan Section 4.1 Platform's Critical Growth Factors
4.2 Required Capacity Investments
4.3 Operating Division Sales Growth
4.4 Gross Margins
4.5 Required Capacity Investments
4.6 Financial Growth Plans and Cash Flow, resulting fromPerforma Statements for at least three years
Private investment Once the growth scenario of the proposed mini-niche consolidation is in place, the final ingredient is identifying a private investment group. It must share the mini-niche consolidation philosophy and have the financial resources to support its establishment and growth. Through the comprehensive assessment program described above, the investment group will be in a much better position to evaluate the mini-niche consolidation's merits - good for both the investor and the platform companies.
Unquestionably, opportunities for the growth of middle-market equipment rental companies within this consolidating environment exist, but the successful establishment of a mini-niche consolidation strategy depends on the structure and depth of the platform assessment process. Exploiting these opportunities has risks, but to those companies that consider involvement only after this comprehensive and systematic assessment of their specific rental marketplace and competition, the rewards justify the risks.
* Purchasing yields greater buying power.
* Operating leverage produces higher utilization rates.
* Regional marketing focuses the message.
* Information systems provide more sophisticated accounting and working capital systems.
* Management can attract more experienced and higher-priced professionals.
* Access to capital is improved.
* One-stop shopping offers customers a reduction of total suppliers.
