Does M&A Mark the Top?

marks the top mergers

By Paul Konikowski

The last week of February 2020 could go down as the worst week in Wall Street history. The U.S. and global markets plummeted as coronavirus fears escalated. Some think it may have had something to do with Bernie Sander’s wins in the early Democratic primaries, and some think it is tied to the price of oil.

I personally think it has to do with the recent mergers and acquisitions in AV land.

Am I kidding? Well, yes and no.

Before I explain, let me first give props to Gary Kayye for scooping the story about Whitlock and AVI-SPL’s intention to merge on Wednesday, February 5, which was by far the biggest news of the month. Just a day earlier, Diversified announced the acquisition of Sensory Technologies. In both cases, the resulting companies should report more than $1 billion in annual revenue. Some might call them “unicorns,” but in my mind, that term is reserved for startups, and all four of the companies in these two deals were far from startups.

In the same week, Yorktel announced the acquisition of Video Corporation of America (VCA) and Starin announced it was being acquired by Midwich Group PLC. Midwich, based in the UK, recently acquired MobilePro (Switzerland), Prase (Italy), AV Partner (Norway) and Entertainment Equipment Supplies (Spain).

So, we had regional news, national news and global news. Integrators getting together, distributors increasing their distribution. Four stories in four days. “I think it may mark a top,” I told a few AV friends. I started to write this article on February 9, and then shelved it. Who am I to be calling a top? I thought.

A few weeks later, and the stock market indexes are down 11%.

It is difficult, if not impossible, to accurately call a “top” in the stock markets, the point when the market pivots from bull to bear market. They are easier to see in hindsight, and recently, some tops have been marked by large mergers and acquisitions and an increased number of stock IPOs (initial public offerings).

In the late 1990s, the valuations of tech companies skyrocketed along with the adoption of the internet. The Telecommunications Act combined with the Taxpayer Relief Act gave investors more opportunities to invest. Low interest rates encouraged speculation buying. Similarly, today’s economy is also booming due to deregulation, tax relief and low interest rates.

The dot-com bubble burst in 2000, what many call the “dot-com bomb” or more simply “dot-bomb.” On January 10, 2000, America Online announced a merger with Time Warner, the largest merger to date. Yahoo! and Ebay were also in merger talks. In February of 2000, Alan Greenspan announced a series of fed rate hikes, and the NASDAQ topped out in March 2000 before falling for the next two years.

On October 9, 2000, Dayton, Ohio-based MCSi acquired Intellisys, part of a Chapter 11 reorganization of Intellisys. For a time, MCSi one of the United States’ largest AV sales and integration companies. In 2003, MCSi itself filed for Chapter 11 bankruptcy protection. The MCSi downfall caused hardships for some while opening doors for others. Many smaller companies swooped in to capture the AV systems integration business. Executives, account managers, engineers and technicians eventually found jobs at other integration companies.

Fast forward a few years, 2007 had a number of cross-border mergers and acquisitions, including big names like Alltel, Royal Bank of Scotland, Barclay’s, BCE, Blackstone, Cablevision and Nokia. Audio equipment manufacturer Harman International Industries was in initial talks to be acquired by Kohlburg Kravis, Roberts & Co. and Goldman Sachs, but the deal was abandoned in the second half of 2007, when money became more expensive and private equity firms put the brakes on spending. The Great Recession officially started in December 2007. AV consultants and integrators saw a huge pullback in construction and spending. Some were smart to invest and embrace the emerging UC and digital signage markets.

For the next 10 years, the U.S. stock market enjoyed a healthy bull market, one of the longest in history, but bull markets can’t last forever. My prediction depends on the results of this fall’s election: if the Senate majority and the White House go back to the Democrats, the stock markets will suffer, and the recession will begin. If the Republicans can manage to hold on to the White House and Senate, then the Republican tax cuts will be safe for the next four years, and my recession prediction may need to be equally pushed out.

What we can count on this year is consolidation. If you overlap the office locations of Whitlock and AVI-SPL you can see which offices are redundant (with all due respect to those offices). Ideally speaking, the amount of business in those areas should stay the same, but the overhead can be combined. There will be layoffs. Front office workers will follow the lead of engineers and technicians who have been switching companies and shifting from integrator to client-side support. Others will decide whether the change in company cultures is enough reason to retire and/or try something new.

I think the best word may be “shake-up.” The AV industry got shaken up last month with the M&A news. We need to lay on the couch and talk it out with our therapists. “It all started when I was in drama club …” I think the shake-up is going to continue. Add in a little coronavirus and market turmoil and I think it’s best to get ready for a recession, a number of bankruptcies and a roller-coaster of emotions.