The Herman Trend Alert|
March 3, 1999
Observers of the corporate scene watched a plethora of consolidations as one roll-up after another consumed a wide range of industries. This move has been especially visible in fragmented industries, mostly populated by traditional main street businesses or "mom and pop" firms. The strategy was to assemble a number of companies, then merge them concurrent with an initial public stock offering (IPO). The terminology to describe these new entities, formed practically overnight, is "poof" companies. While some negotiations were covert, in many professions and industries much of the activity was overt enough that it was practically obvious what was happening.
Some sponsors and venture capital folks are now using a different model. Consolidators continue to buy companies, albeit very quietly. They glue them together as a single operating unit, planning to take the new organization public when market conditions improve. Secrecy in the buying habits of these company builders produces some challenging situations for those on the outside . . . who want to be inside. Investors and other opportunists must now rely on networking, gossip, and rumors to learn what's happening in various venture capital circles. Attempts to gain information can be a frustrating, exclusionary experience.
This model is more capital-intensive than the poof model, as it requires more borrowing. Consolidators are unable to immediately use stock as compensation to current owners. However, this new approach has a potential for greater acceptance by Wall Street; when the new companies go public, they are fully integrated and have an operating history. Though this history may be brief, there is no smoke being blown about how great the new company will be. Instead of trusting proforma business plans and the "wow factor," investors can see precisely how the company has operated in the real world.
Expect consolidation to continue. Mergers, acquisitions, and all sorts of combinations will produce dramatic returns to entrepreneurs . . . while creating powerful companies that will dominate their particular industries. New players with multi-faceted capabilities will emerge overnight. Most activity will be with smaller companies, but the big guys will be mixed into this movement, too.
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