By Mike Iannelli
Like many sectors in the current economy, merger and acquisition (M&A) activity within facilities-management (FM) services has been severely curtailed by a combination of hobbled credit markets and slowing regional economies.
Lincoln Intl.'s research indicates that overall transaction activity in the FM industry during the last 12 months (ending October 2008) is down by nearly 30 percent as compared to the same period in 2007. And, an index of public-company equities representing the sector is down more than 47 percent for the past 12 months, as compared to a 39-percent decline in the S&P 500.
Factors Point toward Growth of FM Services
Many analysts have commented negatively on FM services as a result of their pessimistic view of any industry affiliated with real estate; however, there are a number of industry drivers affecting the sector that may be enhanced by the current economic environment. These factors point toward long-term stability and continued consolidation of FM service providers. They include:
The continued need for facilities owners to focus on their core businesses and control fixed costs through outsourcing.
The constantly increasing focus on facility security.
An increasing focus on worker safety within, and environmental quality of, facilities as critical components of productivity.
Rapidly evolving standards and regulation that address greenhouse-gas emissions and sustainability of new and existing facilities.
Companies are also outsourcing with greater frequency because of these factors, often hiring full-service vendors. According to research conducted by the Houston, TX-based Intl. Facility Management Association (IFMA), use of facilities management increased from 3 percent of owners to more than 15 percent in slightly more than a decade. As a result, building managers have become more sophisticated; they look for vendors that offer several different services to consolidate the number of providers utilized.
Facilities service providers have responded by consolidating across services lines, as well as within specific markets/geographic areas. Service lines that have experienced recent, steady consolidation include security, janitorial, landscaping, engineering/mechanical, food, and parking.
What's Driving Deals in the FM Services Sector?
In the current economic environment, transactions are very difficult to negotiate, finance, and close; however, an examination of the activity completed during the past 12 months offers valuable insight into the types of transactions likely to be prioritized in the coming months ...
Establishing a Global Presence: Given the need to serve clients in multiple geographies, and the inherent benefits of scale, many facilities services companies will use the current environment as an opportunity to fill out their global footprints.
Focusing on Security: Security services has been one of the most active sub-sectors during the last 12 months, with several consolidators making acquisitions. Private-equity buyers are struggling to find financing for deals because of constricted credit markets; however, as they re-emerge as aggressive buyers, they'll likely be focused on targets that are recurring revenue businesses in growing sectors, such as security services.
Developing One-Stop Shopping: With vendor consolidation likely to accelerate in a difficult environment, the emphasis on one-stop shopping will continue to drive acquisitions.
Going Green: Firms with specific capabilities in sustainable facilities management will be a major focus for acquirers in the current market. With LEED certification gaining significant traction, FM service providers will need to bolster their capabilities in maximizing energy efficiency and minimizing carbon footprints.
Filling in the Niches: There are a number of niche industries that require specialized FM services. Many of these niches are also cyclically resistant (healthcare, infrastructure, technology, etc). As a result, service providers with the ability to meet the unique needs of facilities owners will continue to be high-demand acquisition targets.
With expected global economic uncertainty, there's no question that M&A activity will be limited in the near term; however, it's likely that this segment will remain an attractive target for strategic and financial acquirers in the long term.
Mike Iannelli is managing director of the business services group at Lincoln Intl., a global mid-market investment bank. He can be reached at [email protected].