All’s quiet on the consolidation front...
... but probably not for long
by Mark Thill
Midmark’s recent acquisition of Progeny looks like a good match for both, according to observers. After all, Midmark had been seeking an imaging partner for some time. And the deal looks like a winner for Progeny too. But the question is, will it spark a new wave of acquisitions?
That all depends, according to those with whom First Impressions spoke. Yes, small, cash-starved companies continue to make attractive acquisition candidates in the current economic environment. And companies of all kinds will continue to seek partners who can propel them into the digital age - or strengthen their presence in it. On the other hand, following the acquisition binge of the last decade among distributors and manufacturers, a certain status quo - some might call it a balance of power - seems to have settled on the industry, at least for the time being. And credit remains tight, which could keep the blanket on consolidation for some time.
A good fit
The Progeny acquisition in March made sense from a lot of perspectives, according to observers. "It was a good fit for both companies,"says Joe Sakaduski, vice president, Sakaduski Marketing, Chadds Ford, Pa., a marketing services and consulting firm focusing on the dental market.
"It was a unique opportunity for two Midwest-based companies whose technologies complemented each other,"adds Fred Freedman, director of marketing for the Dental Trade Alliance, Arlington, Va.
"I would say it’s another sign of the trend toward the movement toward digital solutions in the dental office,"says John Kreger, dental industry analyst and partner for William Blair, Chicago. And that’s a good place to be, he adds. "We’ve seen that trend clearly: In recent quarterly reports, the higher-tech product lines are the ones growing the fastest, even in a tough economy.”
Bandwidth
But Midmark’s acquisition of Progeny might have more to say about bandwidth than anything else. "This acquisition...offers dental customers one company with significant products and resources,"said Eric Shirley, Midmark vice president and general manager, dental division, when the acquisition was announced March 24. "Progeny brings the leading dental imaging intraoral X-ray products, and Midmark has been growing steadily in the dental industry for the last decade.”
With a broader product line, Midmark has a better chance of driving the sales process, adds Sakaduski. "It gives them the breadth of line to be able to control more of their own business."
Indeed, with the acquisition, Midmark moves one step closer to attaining "one-stop-shop"status. "If you’re Schein, you meet with Midmark and then Danaher, you’ve resolved 60 percent of your equipment distribution sales,"says Sakaduski, adding, "I don’t think you can be an isolated company with one particular product line and compete in a market area where you’ve got companies that have bought up others. There needs to be more partnering.”
Balance of power
Though people in polite company shy away from using words like "power"and "upper hand"when describing the relationship between distributors and manufacturers, one could see the rash of acquisitions as a desire by both sides to stay on top, or at least to keep pace with one another.
"If you’re talking about who has leverage in the channel, size absolutely matters,"says Kreger. The optimal environment for the distributor, that is, the one in which it wields the most power, is one in which it has many small customers and many small suppliers, he says. But those days are gone. "As suppliers get larger, the balance is tipped toward a more level playing field."
In the recent past, there’s been a détente of sorts between distributors and manufacturers, notes Jeffrey Johnson, senior research analyst, Robert W. Baird & Co., Milwaukee, Wis. "Yes, manufacturers always want their products pushed harder, with better end-user data,"he says. Some companies have flexed their muscles with distributors by pulling lines from them. "But we’ve also seen manufacturers cut the number of distributors they work with, and that has tightened the relationship between big distributors and manufacturers,"he says.
And "big"seems to be the operative word. As distributors and manufacturers get bigger, mid-sized and small companies find it harder to compete - though not impossible. Funding the dealers’ margin plus sales meetings, promotions, etc., is an expensive proposition, says Sakaduski. "It prices the little guy out of the business,"he says. That said, there’s always room for unique products and services from small companies that grab dentists’ attention, he adds.
More activity on the horizon
Consolidation activity may be relatively low-key right now, but it won’t stay that way for long, according to observers.
"Mergers and acquisitions as a trend will pick up in the dental industry, as we see some well-capitalized companies continue to generate cash flow,"says Johnson. Small companies with difficulty obtaining credit are takeover candidates. Then again, in today’s economy, big companies are also experiencing difficulty getting credit. "But if the economy stays under pressure and the credit markets open up - and the two are not mutually exclusive - then [large companies] would start to execute on some of these deals,"says Johnson.
"Right now, my gut is that we’d see more deal activity on the distributor side, because that’s where the working capital requirements are getting stretched among the small distributors,"continues Johnson. "They’re feeling more of the pinch."But manufacturers will probably be active as well, as they seek to fill in gaps in their product lines, and perhaps to acquire a mix of higher-margin lines as well as value-priced lines for dentists who are facing revenue challenges of their own, he says.
Acquisitive manufacturers will go where the market is leading them, that is, "small technology,"says Sakaduski. These are the types of devices, such as cancer-screening or caries-detection devices, which cost somewhere between $3,000 and $7,000, and which can help a dentist add tremendous value to his or her practice, he says. "Dealers are eager to get these products. Adding value to the dental practice is a place you’ll see some growth over the next two to five years.”
Dental manufacturers might also seek to acquire diagnostic devices, such as blood pressure devices or saliva screening tests, adds Sakaduski. "I’m a firm believer that if you’re the dentist, and manufacturers put something in your hand that is economical and accurate, why not use it?”
Economy is two-edged sword
The economy presents a two-edged sword for consolidation, adds DTA’s Freedman. Companies experiencing difficulty surviving the economic downturn, but which have innovative or high-quality products or services, are becoming available for purchase at reasonable prices. On the other hand, the very companies that might acquire them are themselves suffering from the downturn, with less cash or credit available for acquisitions.
All that said, consolidation will pick up, for a number of reasons, says Freedman. First, some sectors of the market, such as digital radiography, remain crowded and will most likely face rationalization. Second, the founders and owners of a number of privately owned companies are nearing retirement but lack a son, daughter or other relative willing to take over the business. "They’re looking for an exit strategy,"says Freedman, and selling the business is their best bet.
Third, some distributors are interested in acquiring small manufacturers to develop their private-label business, says Freedman. And finally, "everybody is looking to increase their international business, because it’s really becoming a global marketplace."
Sidebar: 1
Desire for digital technology may drive consolidation
Despite the current state of the economy, high-tech product lines continue to grow, and the desire on the part of dental products manufacturers to offer them to customers may continue to be a driving force of consolidation in the future.
One such technology is CAD/CAM, notes John Kreger, dental industry analyst and partner for William Blair, Chicago. "Here we are, in a lousy economy, with the dental industry slowing down, though not as much as some others. But CAD/CAM is a beacon of strength."The reason is twofold, he believes. First, the technology may be reaching what Kreger calls "a tipping point,"of widespread acceptance, similar to that reached by digital imaging a few years ago. Second, the slow economy might be offering dentists a chance to reflect on where their practices are going, and then make changes accordingly.
"If dentists are running all out, completely busy, they have no incentive to change,"Kreger says. "But if they’re slowing down a little bit, all of a sudden they have a little time to breathe and ask themselves, ‘How can I change my practice to become more efficient?’"CAD/CAM and other high-tech solutions may be the answer.
Sidebar: 2
Consolidation outlook
What’s greasing the skids?
For manufacturers:
- Desire to attain "one-stop-shop"status.
- Desire to cope with the rising cost of doing business with distributors.
- Desire to fill in product-line gaps.
- Desire to introduce or increase private-label or value-priced lines.
- Desire to introduce a premium line.
- Lack of a successor to take over the business.
- Availability of cash-starved companies to acquire.
- Establish international presence.
For distributors:
- Need to fill in geographic gaps.
- Desire to increase sales force and more deeply penetrate existing accounts.
- Availability of cash-starved companies to acquire.
- Desire to build or augment private-label business.
- Establish international presence.
What’s hitting the brakes
For both manufacturers and distributors:
- Lack of cash or credit.
- Major acquisitions have already been made; emphasis on organic growth.
Sidebar: 3
Consolidation’s greatest hits
Editor’s Note: First Impressions has compiled a list of some of the dental industry’s bigger deals of the past two decades. Our apologies for those we missed. Let us know of any glaring omissions by emailing editor Mark Thill at mthill@mdsi.org.
1987: Patterson Dental acquires D.L. Saslow, the third largest distributor of dental products.
1997: Henry Schein acquires West Allis, Wis.-based Sullivan Dental Products to become the industry’s biggest dental dealer.
1997: Midmark Corp. acquires dental equipment manufacturer Knight Manufacturing, Asheville, N.C., manufacturer of dental chairs,
stools and lights.
2000: DENTSPLY International, York, Pa., acquires Friadent GmbH, Mannheim, Germany-based manufacturer of dental implants, for approximately $100 million (U.S.).
2000: 3M Health Care acquires ESPE Dental AG of Germany, reportedly doubling 3M’s dental business.
2001: Henry Schein acquires the dental distribution operations of Zila Inc., with operations in Kentucky, California and Texas; and approximately 20 field sales consultants and equipment sales specialists, and 10 equipment service techs.
2001: DENTSPLY acquires Degussa Dental, a unit of Frankfurt, Germany-based Degussa AG, reportedly the world’s second largest dental company, in a transaction predicted to increase DENTSPLY’s annual sales by $430 million.
2001: Midmark acquires Apollo Dental Products, manufacturer of air compressors and evacuation systems.
2002: Patterson Dental acquires Thompson Dental, augmenting the company’s position in the mid-Atlantic and Southeast.
2003: Henry Schein acquires Hager Dental GmbH, a privately held company based in Duisburg, Germany.
2004: Midmark acquires the dental and veterinary divisions of Matrx, broadening its line of dental air compressors and evacuation systems.
2004: Henry Schein makes three European acquisitions: Demedis, serving Germany, Austria and the Benelux countries; KRUGG, based in Italy; and Muller and Weygandt, a direct marketing firm. The company also acquires Barton-Cyker Dental Supply, Windsor, Ct., with 15 field sales consultants, and whose 2003 sales were approximately $20 million.
2004: Danaher Corp. enters the dental market by acquiring Kaltenbach & Voice (KaVo), Biberach, Germany, manufacturer of handpieces, diagnostic devices, lab products, CAD/CAM systems, etc.; and DENTSPLY’s Gendex imaging business.
2004: Benco Dental absorbs the Texas operations of California-based JB Dental.
2005: Danaher acquires DEXIS, manufacturer of digital radiography.
2005: Danaher acquires dental equipment manufacturer Pelton & Crane; and Germany-based Leica Microsystems, manufacturer of optical instrumentation.
2005: Henry Schein acquires the dental distribution business of Ash Temple Ltd., Concord, Ont., with 2004 revenues of approximately $100 million (US).
2005: Patterson acquires Accu-Bite Inc., a Michigan-based dental distributor with approximately 60 sales reps working out of the Midwest, Southeast and Southwest.
2005: Benco acquires B&B Computer Consultants, an Ohio-based dental technology provider.
2005: Sultan Chemists, Englewood, N.J., changes its name to Sultan Healthcare and acquires Sultan Dental Products, which is expected to account for 35 percent of the company’s annual revenues.
2006: Benco acquires Peterson Dental Supply, Somersworth, N.H.
2006: Danaher acquires Sybron Dental Specialties, Newport Beach, Calif., with specialty divisions KerrLab and Kerr Dental, Ormco, Sybron-Endo, Metrex, Total Care and Innova Life Sciences.
2006: 3M acquires Brontes Technology, Lexington, Mass., developer of 3-D intraoral imaging technology.
2007: Benco acquires KernCo Dental Supply, serving central Pennsylvania.
2007: DENTSPLY acquires Sultan Healthcare.
2007: Benco acquires Marcus Dental Supply, Minneapolis, Minn., gaining a foothold in the upper Midwest.
2007: Danaher acquires Imaging Sciences International, manufacturer of cone beam 3-D imaging systems.
2008: Patterson Dental acquires Leventhal Dental, giving rise to the Patterson Scranton (Pa.) Branch.
2008: DENTSPLY acquires ZHERMACK SpA, Badia Polesine, Italy, producer of dental products sold in more than 100 countries.
2008: Sybron Dental Specialties, Orange, Calif., acquires Pentron Corp., manufacturer of endodontic filling materials and other products.
2008: Benco Dental acquires Eastern Dental Supply, serving south central Pennsylvania.
2009: Midmark acquires Progeny, Lincolnshire, Ill.-based manufacturer of radiographic imaging products.
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