If you’ve been involved in this industry for the last decade, you’ve had an opportunity to witness a never-before-seen phenomenon: the consolidation of HVAC contracting companies.

Since American Residential Service (ARS) and Service Experts first announced the concept back in the summer of 1996, followed by several other players like GroupMac, Comfort Systems USA, and eventually Blue Dot, our industry has undergone some pretty dramatic changes.

The business landscape became dotted with giant, clumsy, morphing creatures, consolidated HVAC companies, utilities turned consolidators, even traditional retailers making forays into our industry. They rose and fell, then rose again, buying up companies, often with no apparent rhyme or reason. Some changed their names, others started merging and splitting, selling off properties and buying others almost as if in a ritualistic dance.

Are all these gyrations just the normal results of new mega-companies trying to “find themselves?” Or is there something deeper at the root of why, so far, none of the consolidated contracting firms have emerged clear leaders? To date, I don’t think any have reached the point of stability — or profitability that they’ve hoped for.

A Brief History

Let’s start with what motivated contractors to consolidate in the first place. The pioneer HVAC consolidators were small groups of contractors who decided to put their companies together, sell some stock, and cash in some of their hard-earned chips. Eventually they would hand over the reigns to second-tier managers and go sit on a beach somewhere. So far so good.

While the initial sale of stock for cash was great for the original company owners, things soon began deteriorating.

Some consolidators changed the scope of business by focusing on growth through acquisition. This way they could continue to show Wall Street good revenue and profit numbers. But the “tapeworms” growing inside their bellies needed more cash to keep everything afloat. As cash dried up, the “acquisition gurus” began offering stock rather than cash for newly acquired companies.

In the first year or so, everything seemed OK. But the bottom dropped when a fickle Wall Street figured out that growth and fattened balance sheets were occurring primarily due to acquisition, not inherent profitability or organic growth. One of the biggest pitfalls for most consolidators is they didn’t have viable plans for increasing market share, sales volume, or profitability.

The truth be told, a number of the consolidators knocked the wind from the sails of the companies they purchased by eliminating the very reason the companies were successful in the first place: their independent spirit and ability to be flexible and adapt to the changing market. Some tried to institutionalize HVAC contracting and service — a process that’s possible on the service side — very difficult on the contracting side.

Lessons Learned

Did the consolidators know some of these things going into the buyouts? Absolutely. But many just got caught up in the frenzy to sign the top “performers” — the well known names —like so many music producers.

In the desire to beat out the competition for acquisition, many closed a blind eye to some of the potential pitfalls that come with trying to herd fiercely independent individuals. Some, who shall remain unmentioned, just made bad deals.

That’s not to say there haven’t been successes. Although not necessarily company-wide, a number of locations across the country have done quite well, growing steadily and yielding very respectable profit margins — a testimonial to the individuals at the helms of these operations.

Still, one of the big failures of some consolidators is they really didn’t have a strong gameplan to differentiate their brand from everyone else. Most started out in the race with the handicap of an unknown brand name. Some were smart enough to keep the local company identity — others weren’t. In retrospect, I can’t think of any one consolidator who has had an unquestionably viable answer to the very simple question: What makes you guys different - why should I buy from you?

The Potential Is Still There

Is consolidation doomed to go the way of the dinosaurs? Not necessarily. It could work if the goal is to pool talent — to go after dynamic companies led by young talent with fire in their bellies. Unfortunately most went after older companies with established bases and owners who were looking for a quick exit strategy.

Had one of the consolidators dared to be different and focused on being a true comfort provider, delivering measured performance to their customers, I believe by now they’d be a real threat to independent contractors.

Fortunately for the independents, this hasn’t happened yet. It’s probably not likely to happen anytime soon as Wall Street has a way of discouraging public companies from taking a long-term approach to things.

While independent contractors are like speedboats, with the ability to quickly shift with the market, and make changes in their approach in a very short time, consolidators are like large freighters that take a lot more time to adjust their course, let alone make drastic changes in their business models.

What might take just months for an independent to implement in his company, could take years of culture change in a larger, consolidated company with hundreds or thousands of employees.

The Future . . .

Is there hope for consolidation?

Maybe, but it would take a very courageous bunch to fly in the face of conventional wisdom and act as coaches, rather than taskmasters and numbers crunchers. It would take meticulous interviewing with prospective acquisitions to look for a true culture fit — beyond their balance sheets and P&Ls (although those need to be healthy too).

If a consolidator changed their criteria for selecting companies based on their cultures and ability to fit together, they could be dangerous.

Such a move would require visionary leadership and the tenacity to hold true to core ideologies. In a sense, it would have to be more of a partnership between people of like minds rather than a consolidation of balance sheets.

I believe there are individuals and companies out there who could easily meet this challenge, but I don’t know if the faint of heart on Wall Street could handle it.