Increased merger and acquisition activity is often a sign of industry maturation. As more buyers purchase emerging solutions, incumbents take notice and start picking winners and making purchases.
The smart-building industry — made up of firms providing energy management systems, facility management technology and other building- and real-estate-focused products and services — is starting to consolidate.
The value proposition for smart-building technology is larger than that of energy efficiency, with the energy management sector, in particular, serving as a barometer for the smart-building industry as a whole.
Over the past year, the signs of consolidation have been accelerating. This increased maturation of the market will be good for many players, with fragmentation having held back the smart-building industry.
Given the still-fragmented nature of the market — there are dozens of firms providing solutions where five to 10 would be sufficient — this consolidation phase may last for a few years.
Types of deals
One trend is for large incumbent vendors, such as Siemens and Trane, to acquire innovative startups. Incumbents like these may have even more cash to spend in the future, with Johnson Controls recently selling its battery business, Honeywell recently selling its homes unit, and Carrier and Otis each to be spun off from United Technologies in 2020.
These firms see acquisitions as a low-risk way to buttress their internal innovation efforts. Given that most smart-building startups have raised $20 million to $30 million, and may have revenues of $5 million or less, these are not big purchases for multibillion-dollar public companies.
In another type of deal, large energy providers are growing their service offerings through acquisitions. This includes acquisitions made by European utilities Centrica, Engie and EDF. In general, the European utilities view U.S.-based energy services as a growth opportunity. But U.S.-based utilities such as Duke Energy and Twenty First Century Utilities are following the same playbook with their own acquisitions.
Amid an increasingly diverse and decentralized mix of energy sources, providing services on top of the commodity energy supply makes sense.
The market for HVAC service, for one, is notoriously fragmented and not technology-enabled. There is room for data-driven offerings to capture market share and deliver better offerings at a lower price point.
There’s also a lot happening in the facility management space, driven by the rise of the workplace-as-a-service concept and incumbents' desire to protect their businesses.
Facility management software providers such as MRI and Accruent (which is now owned by Danaher spinoff Fortive) have been very acquisitive. CBRE, JLL and Cushman & Wakefield are also active — typically adding software providers or more technical services to their portfolios.
While details of most transactions are not provided, the number of smart-building deals is accelerating. Our firm, Aamidor Consulting, provides an M&A tracker for the industry, and we identified 18 smart-building deals in 2016 — growing to 21 in 2017 and 29 last year. Halfway through 2019, there have already been 24 smart-building acquisitions.
What does this mean for the industry?
For building owners and operators, the traditional buyers of smart-building goods and services, all of this consolidation is positive.
One challenge for them has been sorting through the fragmented market. Additionally, buyers typically see risk in working with smaller vendors that may not survive in the long term.
Consolidation reduces the number of potential vendors, simplifying the procurement process. Acquisitions also provide some security that innovative firms can survive market downturns or short-term declines.
These factors should help building owners and operators make procurement decisions faster, even if they don’t end up considering only acquired firms.
Incumbents have a more complex set of scenarios to consider. On one hand, due to consolidation, there may be a limited number of viable acquisition targets in the future. At the same time, many smart-building firms have limited revenue and are at an early stage. It’s hard to justify extremely high multiples (despite the fact that some smart-building firms do sell for high multiples).
The environment, health and safety software space is a good analogue: With a limited number of acquisition targets as the market consolidated, bidding wars emerged for some of the last independent innovators. An acquirer must balance the potential scarcity of innovators with its appetite to spend on speculative purchases.
This is good news for investors, who have a far greater understanding of the smart-building industry than even a few years ago. This is partially due to growth in corporate venturing and real-estate-specific funds. As more real estate firms deploy technology, they view venture investments as core to the strategy.
This enables venture capital firms to raise larger funds with knowledgeable partners, which helps to grow the market (see Fifth Wall’s recent $503 million round, which has 50 corporate strategic investors, as an example).
The current investment landscape is a far cry from the standard software-as-a-service approach employed in the past. That model focused on disrupting existing channels to market by disintermediating incumbents. But it was expensive and hard to scale consistently across buyers.
Smart-building startups may want to ride the current wave and seek an exit. Alternatively, a few firms have merged with peers to get bigger. They likely see consolidation starting and want to get on the radar of potential buyers.
One startup CEO noted that customers are consolidating their vendor relationships. As a response, technology providers will need to offer a wider range of applications/solutions to make the cut.
It’s an exciting time to be in the smart-building space. Some firms have been waiting years for the market to mature. The real winner will be the building owners and operators and, indirectly, their occupants. Buildings have been slow to adopt technologies in the past, but consolidation may be the inflection point the industry needs.
Green buildings initially were fairly rare, but they now have become ubiquitous on the back of accurate data about their hard value. Adoption has been driven by word of mouth and competitive dynamics between buildings that compete for tenants.
Smart buildings could have a similar future, and it’s starting now.
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Joseph Aamidor provides product and market strategy guidance to building owners/operators, building management firms, technology providers, investors and early-stage innovators. Previously, he served as director of product at Lucid Design Group and was a product manager at Johnson Controls.