Fiscal 2015 was an acquisitive year for HVAC & plumbing distributor Ferguson, Newport News, VA. The distributor more than tripled the number of completed acquisitions it saw in fiscal 2014. CEO Frank Roach recently spoke with Editor Jenel Stelton-Holtmeier about the company’s acquisition strategy and how it fits into the overall growth strategy.
MDM: How’s business going?
Frank Roach: Business is going well. We just finished our year in July, so it’s “Happy New Year” at Ferguson right now.
It used to be more of an uneven recovery; now we see a more consistent one across all our businesses. We’re seeing growth in all our markets, albeit somewhat lower than prerecession. The market is good, and we feel like we’re in a good place and doing a nice job of taking share.
MDM: Ferguson completed 13 acquisitions in its fiscal year 2015. How does that compare with prior years?
Roach: That’s up quite a bit from the prior two years. In fiscal 2014, we had four, and two years ago in fiscal 2013, we did three. So it’s up, but we have no specific acquisition target number. We feel like that would drive the wrong behavior. It’s not just the quantity we’re looking for. It’s the shape and the size and the business makeup that we look at, as well.
We look at opportunities for expansion in markets, new product opportunities, ways to complement existing locations, and we do a lot of bolt-ons that are easy to integrate and expand what we do. If you look historically, since I’ve been with the company, we’ve done 150 acquisitions. It’s an important part of our growth strategy.
MDM: What does that growth strategy look like? What are your strategic priorities for acquisitions?
Roach: It’s part of the overall growth strategy. We grow organically through like-for-like and new store openings, and we also look for opportunities for product and business expansion, as well as geographic expansion.
Obviously acquisition is the easiest way to enter a market. Our history of diversification, which goes back some time, really reflects doing a significant acquisition in a new space that gives us a platform for national growth.
The mix of acquisition versus organic has changed significantly since the recession. Before we used to grow 50 percent through acquisition, now we’re in most of the geographies we want to be in, and I would say the mix is more like 80/20, or even 90/10 in the last couple of years, organic.
MDM: What do you think is driving the high level of activity this year? What is it about the current conditions have made it possible to complete so many deals?
Roach: Sometimes it’s less about the economy and more about the decisions people are making in terms of succession planning, investing in the business, etc. To compete today you really need to be committed to technology, and the investments that technology requires, so that’s a consideration too. This was one of those years where a lot of companies, particularly smaller companies, were just making those decisions.
The cultivation of acquisition doesn’t happen within a short period of time. It’s not like putting public companies into play. Some of the companies that we acquired over this past year we’ve been having conversations with on and off for a number of years. We’re OK with that because it’s about relationships, it’s about culture. We want them to know as much about us as they can, and we want to know as much about them as we can. The owners are very concerned about what’s going to happen to them and what’s going to happen to their people.
There was no specific event, no acceleration from us or change in the economy that we can point to. It was just one of those years where a number of those discussions morphed into real acquisition opportunities.
MDM: How do those conversations start? Are these companies that you’ve reached out to or ones that have put themselves out there where you recognize the opportunity?
Roach: It’s a little bit of both. There are companies that make a decision and work through someone else or even contact us directly. There are very good companies out there starting that conversation.
But our approach, particularly if we’re going to a new market, is about beginning a conversation. Maybe it’s something the owners didn’t think about as part of their long-term strategy, but we have the conversation with companies that we think are a very good fit.
The fit – yes it’s about geography and yes it’s about product expansion, but it’s really about people. Our biggest competitor is
the local competitor, and we have a great deal of respect for the relationships that our competition has in a market. And it’s those relationships that we want to attach ourselves to.
MDM: What’s the acquisition outlook for the next year? Do you expect to remain this active or to return to more normal levels?
Roach: I’m not sure what is normal now.
We’re very active across the country among all our businesses, and we’ll just see how it goes. We never predict; we have some closings coming up but beyond that we just don’t know. It’s a timing issue – when to close – but we think there are still wonderful opportunities for us to become associated with very good companies in the markets that we serve.
MDM: Some of your acquisitions – notably HP Products – are outside of your main product categories. Is diversification an active strategy for Ferguson right now?
Roach: It is an active strategy. If you look at HP Products and the jan-san category, that’s the number one category in the MRO space. We feel like MRO was just a natural move for us, a space to be in because it’s about leveraging our people and the product categories that we’re already in, and leveraging our supply chain, e-commerce, etc.
For all the right reasons, it just made sense. We had this product offering gap that we felt like we needed to fill, but we didn’t rush into it. HP filled that product category. We’ve now completed our MRO approach on the residential side, in terms of our offering, and we have a very good company that is helping us learn more about that space.
We do spend a lot of time looking for the right company to make sure it’s the right fit, particularly if it is going to be a platform that we’re going to learn from. It’s worked well, and this diversification has served us well particularly with the cycles that we experience in our industry.
MDM: How does Ferguson approach integration to ensure a more seamless process?
Roach: It’s about knowing each other – the approach, the expectations, particularly around growth and opportunities for the leadership team and the associates. We need to understand their needs and desires. Integrations work well when you have great communication and understanding between the two companies. Essentially what that means is there are no surprises once you acquire a company. That’s a good thing.
We’re pretty good at sticking to a process, a timeline for introducing technology, leveraging supply chain and doing all these things that we need to do to support the new company. We feel like if both sides have done their homework and have been open and honest in conversations, then integrations go well.
And we sometimes use the prior owners and executives from recently acquired companies as references for companies we’re looking to acquire. We may say: “Don’t listen to us. Why don’t you talk to the last three companies that we acquired and get their feedback?”
The roles owners or executives play after acquisition is really dependent on what they want to do. If we’re acquiring good companies – and that’s what we do – they obviously got there for a reason, because of the leadership and the presence in the marketplace. We want to continue with that; that’s very important to us.
It’s also not just about serving customers, it’s about serving the community. And those leaders can help get that connection started quickly. That’s something that we’re all committed to.
MDM: What are some of the biggest challenges around integration?
Roach: Our biggest challenge is balancing the desire for bringing all the things that we bring and the need to understand how abrupt change can be disruptive to our new associates. You get into this “stop-go-stop-go” pattern sometimes. That’s why it’s important to have the conversations up front. If you do, we can move at an appropriate pace with the understanding of what the business requires and what the associates want.
Typically the way it works, when we start bringing in some of the bells and whistles, then they come back and say “Can’t we speed this up a little bit?” We get more of that than “Please, we’ve had enough.”
We start by making sure our associates are taken care of, and then when they start seeing the benefits of size and scale, of innovation, when their fill rates in the marketplace become world class, when they have technology and B2B investments – when they see a lot of these things, they recognize these are tools that we can provide to help them compete best in the marketplace.