Consolidation pace slows in PT sector
By Industrial Distribution Staff -- Industrial Distribution, 12/1/1999
Little more than a year ago consolidation was rocking the power transmission sector of the distribution industry, but today that pace has slowed and PT distributors are watching to see what will happen next.Distributors point to a variety of factors that are affecting the pace of consolidation: flat sales through much of 1999, the Y2K crisis, shifts in market capitalization, falling valuations of distribution stocks, and increasing pressure created by the Internet.
The pace of consolidation has a snowball effect on large and small players in the industry. When consolidators like Applied Industrial Technologies and Kaman Industrial Technologies slow the pace of their acquisitions, that subsequently affects small and medium-size companies looking to sell.
"These larger players have had specific expansion programs in place, but the market capitalization conditions have forced them to reassess their acquisition schedules and plans," says Kevin McCloskey, vice president of Dodge-Newark Supply Co. in Fairfield, N.J. "Based on that, some smaller distributors hoping to exit the industry are having to change their plans."
Doug Savage, president of Bearing Service Inc., in Livonia, Mich., and president of the Power Transmission Distributors Assn., points out that some distributors are backing off consolidation efforts until after Jan. 1, 2000, to get past lingering Y2K issues.
"The issues around consolidation and what I call 'the bogeyman of the Internet' are the two major producers of anxiety in the distributor population right now," McCloskey says. "The Internet is still a very uncertain development. Trying to take advantage of the benefits it offers requires an investment that is not necessarily connected to an immediate payback."
For McCloskey, Dodge-Newark's Internet presence presents an opportunity to remove some geographic limitations. The New York City metropolitan area, he says, is currently affected by an 'out-migration' of manufacturing customers who find it difficult to operate profitably there.
"The other thing the Internet will do for us is to allow us to hire people who can interface with the customer at a higher level, who have more knowledge and the ability to understand customers' issues," McCloskey says. "We can no longer afford to hire people for tasks that can be easily automated, like data entry or word processing."
Distributors across the power transmission sector will be looking for creative ways to reduce costs and improve operating efficiencies in 2000 to compensate for a year of basically flat sales.
"This year picked up a little bit from being flat here in the Midwest," says Savage, whose business serves the automotive and related steel industries. "It looks like we'll finish up slightly for the year. But that wasn't the case everywhere. The economy is pretty good from a consumer standpoint, but the heavy industrial market gets overlooked.
"I think that with the consumer confidence out there, people are buying more [sports utility vehicles] and such and so there's more of a demand for steel, so some of that consumer confidence does trickle down," Savage says. "But they're predicting an increase in interest rates and the overall forecast is to maybe make a million less vehicles in the U.S. next year ... For us, that means business might be good in the first quarter because the plants will be looking to repair their equipment, but in the long term those distributors that are over-leveraged and counting on new production may need to pare back."
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