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For small to mid-size smart grid technology vendors, being acquired by a grid giant or private equity buyer can be a jolting experience. The technology and business lines may remain -- or they may be consolidated and stripped down to fit the acquirer’s business strategy, leaving the acquired company’s customers with a pale shadow of the service and support they’re used to.
That’s how David Pacyna, the former Siemens smart grid executive and now CEO of North American T&D Group (NATDG), described the grid acquisition status quo that his company is seeking to change. Since its founding last year, NATDG has been shopping for small niche grid players, not to strip them down to their parts, but to keep their business models running and their customers happy, as well as to invest in new technologies and new markets.
As a part of Falfurrias Capital Partners, a private equity group formed by Bank of America former CEO Hugh McColl and former CFO Marc Oken, NATDG presumably has some deep pockets to support this strategy. While Pacyna wouldn’t say how much money Falfurrias is targeting at its grid acquisition strategy, he did say in an interview last week that it's looking for more companies to bring into its portfolio.
NATDG’s first acquisition was Charlotte, N.C.-based ITEC, which makes instrument transformers that convert grid electricity into clean power to run grid devices -- a market that Pacyna estimates is worth between $200 million and $300 million a year. Its second is Advanced Control Systems, the Norcross, Ga.-based grid software vendor, founded in 1975, which was bought by Portuguese grid vendor Efacec in 2007.
With Falfurrias’ purchase last week, Efacec ACS is taking back its old name and continuing to develop its wide array of products, including advanced distribution management systems (ADMS), fault detection, isolation and restoration (FDIR) and volt/VAR optimization (VVO), Pacyna said. Those projects are with customers ranging from giant investor-owned utilities, like Southern Co.’s Georgia Power, to small and midsize municipal and electric cooperatives like Georgia’s Cobb EMC, Tennessee’s Morristown Utilities and Dickson Electric System.
“We have put almost another $1 million investment into ITEC since we’ve acquired it, and we’re looking to do the same kind of thing with ACS as well,” said Pacyna.
That’s going to be important for Advanced Control Systems as it seeks to expand its grid modeling and control expertise to new areas, such as distributed energy resource and microgrid management, explained Rob Sadler, Advanced Control Systems' marketing manager.
While that might be possible under the ownership of a grid giant like ABB, Siemens, General Electric or Alstom, it likely would make it much harder to maintain its existing relationships with its smaller utility customers, he said.
As Pacyna noted, companies bought by grid giants tend to be “completely consumed into the larger organization. You lose some of the cultural uniqueness; the products may overlap with something that already exists in a Siemens or an ABB,” he said.
To be sure, there are some outlier examples of acquisitions that have retained their identity within a larger corporate context: consider the way Siemens has incorporated acquired company eMeter’s software into its broader grid enterprise. But usually, “The bigger companies roll up the small companies, and basically, they disappear,” he said.
In particular, grid giants’ imperative to create product lines that can serve as big a market as possible, at as low a cost as possible, makes it hard to justify rolling out new technologies for emerging market needs, with the commensurate service and support features that breaking new ground entails, said Pacyna.
“Their efficiency comes from standardizing their offering. They want every single widget that goes out the door to be exactly like the previous one,” he said.
As the former head of the Siemens energy and automation business, “I saw the R&D cycle, and the administrative molasses that you have to churn through to make progress” in bringing new technologies to market, he said. “Compared to a nimble company like ACS -- and now, an even more nimble company, because it’s not a part of a larger Portuguese entity -- it’s really night and day.”
Private equity buyers are even more dicey, because they can be aimed not at assimilation, but at dissection, by cutting up and selling off an acquisition’s assets. Again, clear counterexamples exist in the grid world, such as Bayard Capital’s consolidation of a broad line of grid metering and communication companies that yielded Landis+Gyr, which it sold to Toshiba for $2.3 billion in 2011. But for every Bayard in the private equity realm, there’s a Bain Capital, looking to strip down an acquired company and liquidate costs -- like U.S.-based employees -- in search of higher return on investment.
Even the prospect of one smaller-scale grid vendor buying another creates challenges. The past year has seen a flurry of acquisitions, such as Qualitrol’s purchase of BPL Global and Ormazabal’s purchase of Current, that are likely to see some of the acquired company’s broader product lines fade away.
Pacyna wouldn’t say which companies might be next on NATDG’s shopping list. “You have to find somebody who is willing to sell, and you have to show up at the right time. There is a little bit of opportunism involved,” he said.
Indeed, GTM Research smart grid analyst Ben Kellison noted that, while the Efacec ACS combination “continued to be attractive in the U.S. for midsize and small utilities" for their operations software and SCADA hardware, it “never provided a distribution channel for the bulk of Efacec's equipment portfolio,” including smart metering, communications and distribution grid hardware.
“Nor were ACS' products wildly successful abroad through Efacec's distribution channels,” with a few notable exceptions in India and Latin America, said Kellison. “With limited synergies, slowing business in the Iberian Peninsula due to macro conditions, and a limited number of projects that leveraged both sides of the business, continued ownership of ACS must have no longer made sense.”
But Pacyna did lay out two broad areas the group is interested in, linked to its interest in finding additional values in combination with its first two acquisitions.
“If we do another traditional hardware-based acquisition, it’s going to be where we see an opportunity to either add intelligence to a product, to enhance its value to utility customers, or where we see that we can link the intelligence that’s in the current technology that’s useful and valuable to, say, something we’re doing at ACS,” he said.
The second is focused on the emerging field of distributed energy resources, grid-integrated demand controls, and other aspects of what Greentech Media has dubbed the grid edge.
“The way utilities are automating their operations, the way they’re using real-time data to perform operations, the way they’re putting controllability out on the feeder instead of back in the control room -- there’s a whole ecosystem out there that could spawn a new field of acquisitions that could allow us to become a more complete player in that evolution,” said Pacyna.