Merger mania

Is bigger really better? Industrial controls suppliers seem to think so, as they continue a decade-long binge of merger mania.

Billion-dollar fish are swallowed by multibillion-dollar fish, with conglomerates moving further up the food chain. The most recent acquisitions include ABB’s approved $2.1 billion bid for Elsag Bailey; Tyco International’s offer to buy AMP Inc. for $11.3 billion; and Siebe plc’s (parent of Foxboro, Wonderware, Action Instruments, and Eurotherm) offer of $12.6 billion for BTR Group plc.

Bigger is better, says a recent report from Merrill Lynch: “Process Control Industry—Smartening up the manufacturing world.” According to the report, the recent spate of industry consolidation should further improve the quality and competitive abilities of the supplier base.

Report author Donna Takeda, vp global securities research and economics group, Merrill Lynch, writes, “The dramatic consolidations of the industry’s served markets—chemicals, hydrocarbon, paper, pharmaceuticals, food & beverage, power—require a supplier to have a more global approach to the market. For the customers, it has meant that they could shrink their supplier lists.

“As the major customers make the transition from national or multinational to global, the suppliers need to understand how to provide worldwide attention to customers’ needs. Technology shifts and globalizing markets will make it very difficult for smaller suppliers to make the cut.”

Customer/supplier relations

Consolidation and restructuring in user markets have changed relationships between customers and suppliers. Downsizing has eliminated much in-house expertise, while consolidation has produced customers with enormous purchasing clout. Suppliers have had to broaden their geographic, product, technology, and service capabilities, and offer significant discounts to guarantee preferred supplier status.

While the past 10 years has seen much debate about open vs. proprietary technology, major global suppliers have their roots, and much of their installed base, in proprietary, or closed, systems.

If “open” systems—based on commercial standards such as PCs, Microsoft operating systems, and the Internet—are the wave of the future, there is still the question of who will service these systems. The promise of creating a unique, custom-engineered application of plug-and-play components from multiple vendors is tempered by the reality of integrating and maintaining a multivendor system.

Ms. Takeda argues that “openness” creates even more need for one-stop shopping. “One-stop shopping becomes critical not because of the purchase price, but because of the day after.”

Long live innovation

For many users, large global suppliers may be the right choice for a broad base of application needs. But before we become too enamored with size, let’s ponder change and innovation. The sheer inertia of large suppliers makes it difficult for them to react quickly to changes in technology.

One of the factors keeping the automation industry strong is the emergence and proliferation of small, agile suppliers which productize great leaps in applied technology. The pages of this magazine are filled with examples of these companies—from software developers, to network specialists, to packaging experts.

As a testament to innovation, the most successful of these companies are usually acquired by the industry giants, often to have the original company founders leave the conglomerate to begin yet other start-up, technology-driven businesses.

And so the cycle continues. Innovation invites acquisition; acquisition creates wealth; wealth breeds more innovation.

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