Pumps & Systems, August 2008

Editor's Note: This article includes information obtained from various sources and research and is intended to be a general overview of recent mergers and acquisitions and how they impact the pump industry. It is not a comprehensive list.{C}

What was once considered a trend in the pump market is now becoming the industry standard as smaller pump companies are merging to form larger conglomerates. Credit the desire for one-stop shopping. Credit an industry where the urgent need for oil and gas and clean water continues to grow at a rapid pace, making delivery deadlines more critical and the requirements for more advanced technical and strategic growth vital. Most of all, credit a booming international market with far-reaching distribution demands.

According to a report by PricewaterhouseCoopers (Producing Value, May 30, 20081), there were more than 4,100 completed mergers and acquisitions (M&A) in the industrial manufacturing sector between 2005 and 2007.  There were 39 transactions worth more than $1 billion each for a collective value of $106.1 billion. Many of the smaller companies are also consolidating. According to the report, more than 1,400 deals had values of less than $100 million and nearly 2,500 had undisclosed values, most of which would have been on a small scale. In 2007, a record $97 billion changed hands, more than double the $45.7 billion that was traded in 2005, according to the report.

The motivation and rationale for sustained growth can seem endless. "The continued consolidation in the North American market has been driven by several factors-foreign companies looking to establish footholds in North America, expansion of products and services within a market niche and acquisition of undervalued companies whose potential have not been fully explored," explains Ed Harvie, vice president of new business development for KSB, Inc., a 130-year-old company that has extended its global range through the years with several M&As.



While organic growth continues to exist, some companies simply do not have the resources or the reach to meet the industry needs worldwide, so they must join forces with other companies to compete, according to John Allen, president of the newly-formed Pump Solutions Group (PSG).

"There are a lot of forced synergies in a lot of industries, but they wake up one morning and say ‘Wait a minute . . . I don't have the same channel partner that you do. I don't sell the way you do, and I don't have the same raw materials,'" explains Allen, who says he believes mergers and acquisitions will become a necessity moving forward. "In this culture of the world of pumps, it is just too logical to take advantage of the two key areas of the supply chain-raw materials on the front end and distribution on the back end."

The pump market worldwide is worth more than $30 billion and is extremely fragmented, according to Allen.  "There are about six pump manufacturers that exceed $1 billion, which means there are hundreds of pump companies worldwide that are less than $25 million. About 70 percent of the pump requirements worldwide are now outside the United States. This is due to the great need for infrastructure in emerging nations. So if you realize that 90 percent of all high cranes to build construction worldwide are outside the U.S., that gives you another tipoff that in the emerging markets, that's where all the pumps are."

These statistics become important to smaller companies without a global footprint. Allen says his experience shows that combining the expense of acquiring the appropriate manpower with the time involved in developing channel partners, global procurement could take 5 to 10 years-too long for survival in this competitive market.

"For a smaller U.S. pump company to globalize, it needs to piggyback," Allen says. "For example, more than 60 percent of Wilden's total sales is international, and that is a key part of the PSG. Then you have hub and spoke going on . . . clearly, if Wilden is strong in Thailand and Griswold is virtually nonexistent, overnight there is a clear candidate for the Griswold product-which would take years for Griswold to examine and execute if they tried to go to Thailand. So the globalization factor is overwhelming for a small company. Piggybacking is needed expeditiously for survival."

Clifford Hahne, president of Hanson Pressure Pipe, contends that M&As will not bring an end to the smaller companies that focus on business within the United States. "In the U.S., there is free enterprise and that is what makes the U.S. great," says Hahne, who has been involved in several major M&As during his 25-year career. "There is always someone willing to go to work and try to compete with the multinational corporations. I think we will continue to see market assimilation in building products. You get a series of three or four international companies that do the majority of the work. Overseas you do not see a lot of mom and pops. You see only the bigger multinationals. The U.S. is different. We are driven by different drivers, like customer satisfaction and patriotism."

Still, global reach continues to be important for the industry. Combining resources helps to satisfy international needs more quickly and efficiently. The Weir Group recently acquired the CH Warman Pump Group (CHW) to broaden its mining and minerals processing efforts in Africa.

"This acquisition allows us to see our slurry pump line in all of Africa," says Scot A. Smith, divisional managing director of Weir Minerals Division. "This acquisition gives us critical mass in Africa. We can now invest in this region of the world with confidence."

Growing Pains - The Adjustment Period

Many executives agree that in a perfect world, the growing pains of mergers and acquisitions are generally only felt internally.

"The idea is to make the whole transition appear seamless to the end user," Allen says. "But the adjustment period is always an issue. We usually talk about integration. Due diligence-where everyone puts their efforts in an acquisition-is extremely important. Where the failures happen is in the execution of the integration."

That seemingly seamless effort can take months, even years, to achieve.

"It's like people finally make the purchase and they check the buildings and the codes," Allen explains. "The intellectual capital and the products fit form and function and so the management takes a deep breath and a sigh of relief. We clap our hands . . .  glad that's done  . . . and hope the integration will sort of take care of itself. That is where the nightmares take place.

"This is where you try to mingle embedded cultures. This group has always done things a certain way and someone comes in and says ‘Why don't you try it like this?' So the art in this is seeing how fast you can create universal buy-in, get in the same canoe and go down the river. There have been tremendous M&A failures in our industry and there have been successes. It is too early to say how fast we will integrate, but suffice it to say one of the lead-horse programs, Wilden, has been tremendously successful using speed as its greatest asset. I see speed as a greater asset than patent-which is first to market. I can assure you that the speed with which we are trying to integrate is probably one of the fastest attempted.  In 60 to 90 days we are attempting nothing short of a full integration of the sales channels worldwide."

In general, "Sometimes it takes years . . . sometimes it never works," Allen says.

Hahne agrees that the goal is to ensure the end user is unaffected, but there are hurdles.

"There are so many growth opportunities to continue to put our footprint out there," Hahne says. "But we have to take some time to get our balance sheet in order. It takes a while to fund a multi-billion dollar acquisition. It can take 18 months or more of regrouping.

"I was involved in an acquisition that went from a publicly-owned company in the UK to a virtual private company in Germany. There was a different form of accounting and a different form of measurement. They speak a different language and take different holidays. There are obvious pressures that come together. We hope the majority of the pressure stays with senior management so the others do not feel it.  I don't think the customer sees it in our industry, but the employees feel it. We are still a pipe company, we just have a different owner. But sometimes you bring companies from competing markets together and there is a little bit of pain in the consolidation."

Business Model and Branding

When it comes to merging companies with various business models, brands, philosophies and histories, the secret can be finding the right recipe.

"When you go through a buyout, the employees are uncertain whether they still have a job." Hahne says. "Everyone thinks that a buyout means a cutback. It happens, but it doesn't happen with the majority of the people. Usually, the company is purchased because the people are doing a good job."

It becomes an advantage when employees see the big picture and how growth can ensue with the multiplying of people, technology and distribution resources.

"Everyone is insecure at first," Hahne says. "We just did a rollout where we went to every plant and met with more than 2,000 employees. We gave them a presentation and the opportunity to ask questions. We fed them and visited with them. We gave them our mission statement: ‘Bringing the basic necessity of life to the people.' This assured them that we all have a common goal. Everyone has to have water and everyone has to have power. Anytime you get a glass of water or turn on the air conditioner or go to the restroom it is going through a pressure pipeline."

Most new companies in a consortium maintain their people, who are given opportunities for growth-not only financially, but also with respect to the opportunity to manage and share best business practices.

"The amount of change incorporated depends on each company," Allen says. "Some companies with lower margins are in need of an embedded culture change. Others require very few alterations because tampering with it may reduce its success. If there was a group of a dozen pump companies and I was running it, there would be various shades of change in each of them. Some would require very drastic changes and some extremely moderate changes because that would be good management. The idea of coming in and ‘peanut-butter spreading'-saying you must all do it this way-will take away from the company's character.

"Make no mistake . . . the best practices from Company A should go to Company B if it will make them more money.  The overlying factor is not to just change cultures because it seems like a good idea and we read a book about it, but will it make the other company more money?"

Effect on the End User

The end user should not be ill-affected by the creation of a consortium, Allen says. "In fact, they should be better off. Those who have poor delivery within the group should have their delivery made better by the teachings in the group that has great delivery. The goal clearly is not only that the synergy will create more earnings, but it will be easier to do business. Those companies who are not customer-service oriented should be taught by those who are. The ultimate goal is to serve the customers' needs better. That does not happen frequently enough.

"Historically in the pump business, I think the end user would say that the consortiums have not helped them. My experience tells me the gut reaction from the end user is that consolidation has not made the product easier to ascertain or more customer-driven. Therefore, that should be an overall aspiration, but it is rarely fulfilled. That is one of the biggest challenges I have-to prove that you can put together a multitude of companies, co-mingle best practices and actually come out of this with a better customer satisfaction index."

Other benefits to the end user are obvious.

"For a distributor and customer, it is one-stop shopping," Allen says. "If a customer can get an amalgam of products from a company that they truly enjoy doing business with, then that is positive for them."

Hahne agrees. "Generally, bigger is not always better," he says. "But in our industry, because we offer alternate products (aggregate, ready-mix, cement) it does allow us to do some things better than any single supplier could do on a job. We try to keep the personal touch, but it also gives us the wherewithal to do some additional things on the engineering side. We feel like our value-added is a larger engineering department. We operate in three different languages (Montreal - French, Texas - English and Spanish into Mexico). These are some of the things smaller companies cannot do.  The customer can get everything they need with one point of contact."

Harvie says he believes the impact on the end user is generally positive. "The acquired companies often retain their identity and have a greater variety of products to offer to their existing customer base," he says. "In addition to an expanded service and product portfolio, these companies may now have greater financial backing and access to technological improvements which translate into higher customer confidence and customer service.

"In most instances of well-planned mergers or acquisitions, the lead company has considered the impact to the end customer prior to making changes in either the direct sales force or a specific dealer serving the customer."

Sometimes M&As create focus rather than diversity.

"The interesting point is the strategic rationale that companies are using to drive acquisitions," Smith says. "Weir Minerals has stayed very close to what we know. Our approach allows us to enhance the focus we have on handling slurries. Our recent acquisitions and expansions allow us to better manage and protect our intellectual property and bring our products to more customers. Our acquisition strategy brings more focus on [our] slurry handling products, not less.

"Specific to our area of expertise, our approach has a positive effect on our end customers as we can invest in better, longer wear and better efficiency products. This allows our mining clients to manage more efficient mines with the end result of more products produced."

The Measure of Success

The success of an acquisition is not always clear and can be determined through a variety of measures.

"Was the merger made successful because the stock grew?" Allen explains. "Was it made tremendously successful because the customer is happier? You can say it is successful because 10,000 people were laid off and the profit increased  . . . but perhaps the customer is not happy. How do you measure success?

"Someone's stock may not have done particularly well, but they took the weaker links of the consortium and made them more technology driven, upgraded their computer systems and made deliveries better. So a customer could say, ‘I'm glad these companies merged because I get my pumps faster.'  But the stock tumbled, so how does the company feel about it?

"It is safe to say that, historically, there have been greater difficulties pulling off pump consortiums than most people expected. Some have been less successful than most people anticipated and perhaps it has taken longer to change into one imbedded culture than anyone would have proposed."

Hahne agrees that measures of success can often be subjective. "I went all over the country looking at every pipe company in the U.S. and determined the ones that fit with us in personality and a core belief. A lot of companies have different internal drivers. Some just want to get rich personally. Some want to do the right thing by the community. Some fall somewhere in between. You have to decide what you want and need, look at the footprint and then go to work. The ones that don't fit you just sell them or close them and try to admit that you made a bad decision."


Building conglomerates can be worth the effort and the investment-not only for the success of the corporation but in service to the end user.

"The formulation of a consortium of pump companies within a larger group is quite logical for all the standard reasons, like economies of scale," Allen says.  "Within the framework of the industrial world, the beauty of the formulation of pump synergies is well beyond just the stereotype of ‘What a great idea.' It is synergistic because most pump companies are using some form of distribution chain or channel partner and they are using really only three to five of the same major raw materials. Everybody in the pump industry needs a distributor in Tennessee and one in Thailand. So if two or three groups come together and one is very strong in Tennessee and one is very strong in Thailand, well, this all becomes obvious.

"There is only a limited amount of raw materials to use to make pumps-aluminum, stainless steel, ductile iron, polypropylene, various plastics. So your raw material capture, whether you have one pump company or 30 pump companies, is that they are going to need ductile iron, all of them, and they all need stainless steel, so the supply chain capture is virtually the same. Then of course, they are all manufacturing, so there are manufacturing efficiencies, best practices, process mapping, etc. So the required functions are so spot on that it goes beyond logic."


1 To download a copy of Producing Value, go to www.pwc.com/manufacturing.