Data-Enabled Value-Added Resellers Targeted in Mergers and Acquisitions

Over the past two decades supply chain management has become a critical component of the Value-Added Reseller industry, directly contributing to distributors’ financial performance. COVID-19 has exacerbated supply chain disruptions with port chokepoints, trucking bottlenecks, labor shortages, and export bans. Recently, severe congestion at the Port of Los Angeles and the Port of Long Beach due to labor shortages led to an increase of 113% in container volume as ships stalled awaiting berths, according to Container Management.¹ As a result, buyers have been attracted to value-added resellers that can provide greater visibility into product tracking, pricing data, and demand forecasting through automation and digitally-based capabilities.

Through June 14^th merger and acquisition (M&A) activity in the Value-Added Reseller industry increased 12% year-over-year (YOY) for a total of 84 deals. Of note, Omni Cable Corporation announced its acquisition of Houston Wire & Cable (Nasdaq:HWCC) for an enterprise value of $135 million in March. Texas-based Houston Wire & Cable operates as an industrial distributor, providing wire, cable, and fastener products in the U.S. The acquisition will bolster Omni Cable’s value-added services including logistics support, digital inventory management programs, and customized online ordering capabilities. With Houston Wire & Cable’s digital inventory management program, Omni Cable gains operational transparency through digitally modified specifications and inventory profiles and its pay-as-you-release invoice program.

Strategic buyers accounted for 65% of transactions announced or closed in 2021 YTD, as value-added resellers sought synergistic opportunities with sector-specific targets. Private equity (PE) add-on acquisitions represented 25% of deals in 2021 YTD, a 4% increase from the prior year. Heightened PE interest in the Value-Added Reseller industry is attributed to firms' utilizing tuck-in acquisitions to minimize risk and maximize profitability of platform companies through geographic expansion, broadening customer base, and adoption of advanced capabilities. Notably, Clayton Dubilier & Rice-backed SunSource acquired Carotek in February for an undisclosed sum. The acquisition bolsters SunSource's specialty instrument and control panel distribution segments, in addition to integrating Carotek's value-added automated packaging service.

Value-Added Resellers Integrate Digital Supply Networks

Value-added reseller companies have adopted digital supply networks (DSNs) to gain transparency into the supply chain path and to uncover actionable operating data to help combat supply chain disruptions. DSN platforms improve internal processes for distributors through workflow automation, shipping notifications, pricing data, and real-time allocation of new orders, optimizing service, cost, and capital. DSNs are also interoperable with automated equipment in distribution centers, lowering operational costs throughout the supply chain with standard sized trailers, product packaging, and containers to reach maximum product capacity. Additionally, this technology supports demand forecast accuracy, reducing error by 30-50%, according to McKinsey.² By combining both information technology (IT) and operational technology (OT), DSNs create an integrated data cycle that provides continuous tracking and forecasting, resulting in more timely and accurate information than paper trails and manually updated spreadsheets.

Shingle & Gibb Automation, a value-added reseller with a focus on electrical connectivity and network connectivity products, is an example of a company with DSN capabilities that was recently acquired. Shingle & Gibb Automation has integrated advanced automation and product tracking solutions through data collected by on-site sensors, accessible via its networking platform. Graybar Electric Company acquired Shingle & Gibb in January for an undisclosed sum. Graybar distributes electrical, communications, and data networking products, specializing in supply chain management and logistics services. "With its exceptional customer focus and advanced capabilities in industrial automation and control, we believe the acquisition of Shingle & Gibb Automation will accelerate Graybar's growth and strengthen our long-term position in industrial automation," commented Graybar Chairman, President, and CEO Kathleen M. Mazarella in a press release.³

Wholesale Opportunities Discovered from Increased Business Intelligence

Increased business intelligence from DSN and other supply chain technologies have shifted value-added reseller business models to incorporate a vertical one-stop-shop for all transactions in the wholesale business-to-business (B2B) market. This strategy enables value-added reseller companies to increase overall profit margins by tracking the volume and profit margins of individual products, enabling companies to prioritize certain products based on the bottom line. Online marketplaces, such as Mirakl's Marketplace Platform, have lowered barriers to entry by supporting third-party wholesale distributors seeking vertical integration with a focus on value-added products and sales analytics.

Leading wholesale distributor Fastenal (Nasdaq:FAST) utilizes the vertical business model through its E-commerce platform and on-site vending devices. With over 100,000 active vending devices, Fastenal is able to collect point-of-sale (POS) data and client feedback, which is relayed back to its distribution and supplier partners. Among its top supplier partners are 3M (NYSE:MMM), DeWALT, DuPont (NYSE:DD), and Honeywell (Nasdaq:HON). The increased visibility of supply chain data supports decision making on access controls, inventory management, and pricing for reordered products. Fastenal achieved a 3.7% increase in total net sales in Q1 YOY to reach $1.4 billion, attributed to 68 new onsite signings and a 35.5% YOY increase in daily E-commerce sales, according to its Q1 investor presentation.⁴

The Future of Data-Driven Value-Added Resellers in M&A

Capstone expects value-added reseller companies with integrated data capabilities to be at the forefront of M&A transactions through 2021, given 94% of companies reported experiencing supply chain disruptions due to COVID-19, according to Accenture.⁵ The ability to demonstrate a solid data foundation on client accounts, purchasing behaviors, and demand forecasting will garner heightened strategic and PE buyer interest at premium valuations.

Endnotes

1. Container Management, "Port of Los Angeles Volumes Reach New Heights Amidst Congestion," https://container-mag.com/2021/04/19/port-of-los-angeles-volumes-reach-new-heights-amidst-congestion/, accessed May 16, 2021.

2. McKinsey & Company, "Supply Chain 4.0 -The Next-Generation Digital Supply Chain," https://www.mckinsey.com/business-functions/operations/our-insights/supply-chain-40--the-next-generation-digital-supply-chain, accessed May 17, 2021.

3. Automation.com, "Graybar Acquires Shingle & Gibb Automation," https://www.automation.com/en-us/articles/january-2021/graybar-acquires-shingle-gibb-automation, accessed May 17, 2021.

4. Fastenal, "Investor Teleconference Presentation First Quarter 2021," https://s23.q4cdn.com/591718779/files/doc_financials/2021/Q1-2021-Investor-Presentation-4.12-R10_FINAL.pdf, accessed May 18, 2021.

5. Accenture, "Supply Chain Disruption," https://www.accenture.com/us-en/insights/consulting/coronavirus-supply-chain-disruption, accessed May 18, 2021.