Innovation Drives M&A

More distributors look to acquisitions for innovative growth.

Mergers and acquisitions were once a primary result of excess capacity, says Steve Samek, author of the first Facing the Forces of Change study for NAW back in the 1980s. And while that may continue, today there are many other drivers behind the deals.

"The mergers you're seeing today are really about innovation," Samek says.

Earlier this year, I spoke with Samek and Evergreen Consulting's Brent Grover about how distribution has changed over the last 35 years.

If a company has an approach to its market that values innovation, it can garner a higher premium, Grover said. "I think the stock market value on innovation is apparent if you look at the stock price of Amazon."

It's a balance of risk and reward. Companies like Grainger have historically invested in internal innovation, but that can result in millions of dollars being spent on an idea that customers don't have the infrastructure to support it or that quickly becomes obsolete. Grainger's CD-ROM catalog is an example of this, Grover said. Many customers didn't have the drives required to read them.

Grainger's early investments in e-commerce, however, paid off by making it a recognized leader online. But not every company has the resources to undertake the kinds of investments that Grainger can.

Instead, they can look to other players who have already tested the new idea, Samek says. "They can say, 'There's this little company over there that's doing something really neat.' They acquire the company to apply (the innovation) across their own company."

It can be a less risky investment to buy a proven quantity than to start from scratch on your own.

In recent years, we've heard about this in many areas. Arrow Electronics acquired a media portfolio in order to "strengthen its position as a thought leader." Companies with ties to the energy industry have acquired engineering firms to bring the talent in, even if the acquired company doesn't appear to outsiders as an obvious fit. And as technology continues to advance at breakneck speeds, chances are good that we'll see more of these deals.

While the specifics vary from sector to sector, it's certainly a different environment for M&A than we saw in the 1980s, Grover said.

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