The biggest step of all10 November 2010
Would the industry, or its customers, really benefit from further consolidation? Phil Bishop explores the issues.
On 8 October 2010 Konecranes issued a statement that it had made an approach to Demag Cranes & Components to discuss joining forces.
It said: “We believe that a combination of Konecranes and Demag Cranes would follow a convincing industrial logic and would be highly beneficial to both companies and their respective stakeholders. Konecranes is convinced that if Demag Cranes were willing to engage in a dialogue, a structure for a potential business combination could be agreed that would be in the interest of both companies’ stakeholders and also be viable from a regulatory perspective.”
Demag said no, but that is unlikely to be the end
of the matter. If these two giants of the industry were
to get together, it would have huge ramifications
and could represent end-game of 20 years of
Over the years, this magazine has reported on dozens of mergers and acquisitions that have changed the landscape of the industry. Two names have recurred more than any other: Konecranes and Columbus McKinnon.
Columbus McKinnon has brought together a family of brands that includes Yale, Abell Howe, Budgit, Chester Hoist, Coffing Hoist, Duff Norton, Little Mule, Shaw-Box, Loderail and, most recently, Pfaff. CM’s growth was checked by the downturn in the US automotive industry in the late 1990s, which particularly hit the 1998 acquisition of LICO, a manufacturer of conveyor systems. Amid shareholder unrest, manufacturer LICO was soon sold but the company took a hit.
CM regained the acquisition habit in 2008 with the purchase of Pfaff and we can expect more to follow in the years ahead. President Timothy Tevens has gone on record saying that he wants to double annual sales to $1 billion, with up to 40% of this ($200m) likely to come from acquisitions. He is particularly keen to expand in China.
The march of Konecranes began in 1997, when it acquired German crane builder SWF from the MAN group. This was not its first acquisition, since it had already taken over hoist manufacturers R&M (USA - 1983) and Verlinde (France – 1986), process crane specialist Landel (USA - 1987) and service companies Lloyds British Testing (UK – 1991) and Kranco (USA – 1993).
However, the stock exchange listing gave Konecranes access to finance that would enable it to launch a stampede of acquisitions that have included the big names of Morris (both the US P&H version and the UK one), Kito and Stahl. Other purchases have included all or parts of Trost & Hilterhaus, Kulicke, PRIM, Shepard Niles, Breva Technics, Provincial International Cranes Inc., Overhead Crane Services, Noell, Cranex, Caillard, Crane Manufacturing & Service Corp., Burlington Engineering, Zaporozhcrane, Ausio Sistemas, Eydimen 2000, Knight Europe, Dynamic Crane Systems, Sanma, Bouyer Manutention, MHS and most recently in October 2010, WMI Cranes of India.
Between 2004 and 2008, during the peak of the buying spree until the world economy slowed, Konecranes’ annual sales grew from €700m to €2.1bn.
Whereas CM’s acquisitions have tended to be manufacturers of hardware – with companies like clamp manufacturer Camlock and chain manufacturer Lister as well as a raft of hoist manufacturers – Konecranes has targeted crane builders and service companies. Hoist manufacturing capability that has been brought in along the way has not usually been targeted for exploitation. The strategy has been twin-pronged: sell more Konecranes hardware, and expand the service base. Each acquisition was designed to fulfill one or both of these briefs. Konecranes has developed a global network of more than 500 service locations that together have more than 360,000 units under maintenance contracts. Of these, just 25% were manufactured by Konecranes.
CM generally leaves the interfacing with end-users to its customers. Its strategy is based on its network of independent dealers who co-operate under the brand Cranemart. It is the Cranemart companies, not owned by CM, who build cranes and/or do maintenance. Whereas CM does not compete with its customers, Konecranes does. It even competes with itself: it is not unknown for Verlinde and SWF to compete for the same contract.
The approach to Demag
Despite all of the above consolidation carried out by just these two companies, Konecranes believes further consolidation is necessary, particularly in Europe.
Konecranes’ president Pekka Lundmark explained further at a news conference on 21 October, called to discuss third quarter interim results. He said that compared to its suppliers and many of its customers, Konecranes was not a large company. “If we look at the big picture in the world, the fact is that this is still a very fragmented industry,” he said. “Further consolidation in our industry is needed to create players with a critical mass to be able to deal with the quite big challenges in today’s world.”
He went on to explain that the greatest of these challenges was the one presented by China. “I am more and more of the opinion that many people underestimate the strength of China and their companies in the world,” he said, noting “how quickly and dramatically they are outperforming western companies in many sectors.”
Lundmark said that Konecranes wants to join with Demag “to create a European response to these developments in the world”. Chinese manufacturers are already a global force in port cranes, he said. “In industrial cranes, their presence is increasing, currently mostly in Asia and also in Africa—not much yet in developed markets, but just wait.”
Lundmark insists that the offer to Demag was simply a polite enquiry. “Our approach was completely and genuinely friendly. We want a dialogue with Demag to see what logic and type of structure could be created so that it could serve both companies and their stakeholders’ interests.”
He also emphasised that Konecranes has a very strong balance sheet, with virtually zero gearing.
The Demag board was swift to rebuff the approach, saying that “further discussions with the relevant parties are not in the interest of the company or its stakeholders”. Ultimately, it is not the board’s decision to make. Demag has been a publicly traded stock since 2006 and so any takeover is dependent on what is a very wide spread of shareholders, the largest of which is Cevian Capital, headquartered in Sweden. Whether Swedes might be any more or less open to alliances with neighbouring Finns than the Germans are remains to be seen.
Demag has reason to be wary of takeover approaches. It has only just settled into its current structure after several years of ownership upheaval dating back to a previous hostile takeover in 2000, when phone company Vodafone acquired Demag’s then parent Mannesmann in a hugely controversial battle. Crane and other interests were swiftly divested by Vodafone.
Lundmark insists that Konecranes has no desire to get into a battle. “All we are asking for is a dialogue,”
he repeated. “This is not a hostile move in any way from our side.”
The Demag board set out its position in its rebuff, suggesting that although Demag has not been in the acquisition game itself in the past, this could now be about to change: “Demag Cranes is pursuing its own clear standalone strategy, which is based on expanding its business in emerging markets by introducing new product lines and by benefiting from significant growth in the highly profitable service business. The Demag Cranes Group’s sound financial position may create opportunities to turn competitors’ possible financial problems to its advantage and participate more actively in the process of industry consolidation than in previous years. The emerging markets are expected to be the focus of these potential activities.”
After being knocked back by Demag, Lundmark downplayed the importance of any such deal to Konecranes. Yes, the company had made lots of acquisitions in the past but organic growth had always been the most important strategy, he said, and had accounted for “more than half of our growth”. Graphs were shown to demonstrate how in any given year, that year’s acquisitions had only added incremental to turnover. There was no graph splitting out the contribution of acquired companies over a five or 10 year period. Using statistics in this way appears to suggest that a year after a company is acquired, its entire revenue (rather than just its post-acquisition revenue growth) counts as organic growth. While he believed a deal with Demag “would be a good combination”, he said that “we are no way dependent on any single deal. The number one strategy is organic growth.”
What if it happened?
Even if Demag shareholders were interested in the prospect of joining up with Konecranes, there would be regulatory hurdles to clear. The way that market information is reported among manufacturers, each company knows its own market share but not that of any of its competitors. That Konecranes was keen to learn more about Demag’s numbers was another motivating factor in wanting talks, even if it did not lead to an eventual deal. However, we can be sure that these are two of the big three companies in Europe, along with Abus.
By some estimates, Konecranes and Demag may together have more than 60% of the European market. Andrew Pimblett, managing director of the UK’s Street Crane, says: “As I understand it, EU competition law hinges on whether a merger or acquisition puts the dominant party in a position from which it could abuse its power. I think many in the industry would argue that the loss of an independent Demag would bring us very close to that position.”
In the USA their market dominance may not be quite so great, but still enough to raise the interest of the authorities. “I wouldn’t be surprised if there were anti-trust questions raised,” says Rich Warriner, vice president of Ace World Industries. “I think someone would challenge it. But Demag has lost market share in the US in recent years, so I don’t know that there would be that much impact.”
Given that combined sales of the two companies are less than €3bn, they would probably have less than 20% of the global industrial crane market. Asked about possible regulatory challenges, Lundmark said: “We don’t know Demag’s numbers but based on our analysis we calculate that [a deal] would be do-able. This is why we want a dialogue, to verify this preliminary assumption.”
He added that it was “too early to speculate” on what divestments could be made to make a Demag acquisition allowable.
Competitors are happy to take the opportunity to argue that if Konecranes did buy Demag, it would be bad for customers. “Our clients want to choose and not have a monopolist,” says Michael Geiger, marketing and sales manager of Austria’s Hans Kuenz.
Pimblett says: “From an end user point of view the industry in Europe certainly does not need further consolidation but conversely it would be a huge boon to Street. Konecranes already commands such a large market share under its various brands, customers now get little enough choice in parts of Europe and elsewhere. As things stand many end users go to the market, identify a number of bidders but don't realise they are being offered the same Konecranes equipment painted different colours. It is not uncommon to come across situations where four or five quote for a crane when perhaps one is Kone and the others are all Kone under the R&M, SWF or Verlinde brand.”
He continues: “It is difficult to see how this “me too” process is good for any of those involved except Konecranes. The independent crane makers using the branded products have nothing to differentiate their offers except price and Konecranes can always undercut them if they want the order. The worst of it is that Konecranes usually has a service depot close in the territory and they or another Kone brand dealer is likely to pick up the valuable service and parts business. Customers are getting little if any choice and what ever you think of Kone equipment it is certainly not suitable for every application.”
Pimblett believes his own company would benefit. “The flip side is that consolidation often helps the remaining players take increased market share at no cost. This was very much the case in UK when Konecranes took Morris out of the market. The benefit to Street in our own backyard has been significant. The UK economy is at a low ebb but our home market crane order book is an all time record. In the final analysis it’s a numbers game. If there are fewer players, those remaining take a bigger share.”
The argument that the European industry needs a bulwark to fend off Chinese competition does not persuade competitors either. “I think that’s just a rationalisation,” Warriner says.
Geiger says: “Kone is already manufacturing in China, so it is no difference to the Chinese.”
Pimblett agrees: “The only threat from China is Konecranes, who are increasing their China content every year. We have simply not come up against the Chinese crane makers in Europe.”
Given that acquiring Demag would take a significant player out of the market, it is hard to see that a new entrant from China would find it harder to enter Europe. It would certainly, however, create a major force.
Konecranes would add the market-leading Gottwald port cranes to its product range. It would have the opportunity to further expand its already mighty geographic reach. Demag has production facilities in 16 countries, representation in more than 60 and customers in more than 100.
Perhaps most significantly, however, would be the addition of Demag’s €300m service business and its installed base of more than 650,000 electric cranes and hoists around the world, which is more than any other manufacturer can claim.
Access to this installed base is “one of the reasons why we believe there would be a pretty good logic in the combination,” Lundmark said. Not the only reason, but one of them, he added.
The service business, after all, is where the real growth is likely to come from.
A Konecranes/Demag combination may actually lose crane sales to competitors, as Pimblett suggests. Demag’s industrial crane products would likely be heavily rationalised into the Konecranes family and customers would surely get less choice.
Lundmark is certain, however, that there are huge prospects in servicing and maintenance.
Service and maintenance is already the largest segment of Konecranes’s business, accounting for 37% of turnover. For Demag, services account for a healthy 30%. For each company it is the part of the business impacted least by recession and with the greatest prospects for growth.
In Lundmark’s words: “Very large industrial operators or port operators, including process industries, will most likely in the coming years start to outsource their maintenance services in a serious way, many such markets having been quite closed. And to be able to be a credible service supplier for that type of player you definitely need critical mass. And in this particular combination [of Konecranes and Demag], if that would be possible, we believe that there would be definitely a situation where one plus one would be more than two.”
Will a deal ever happen? Left to shareholders, it still yet might.