Welcome to the great lighting industry consolidation

When Osram Licht completed the €500 million sale of its profit-challenged LEDvance lamp division to a Chinese consortium late last week, the transaction was indeed a milestone in the Munich company's efforts to adapt to the era of LED lighting. But the deal served a broader purpose: It punctuated the frenzied merger and acquisition mania that is sweeping the global lighting industry.

Osram's sale to a trio of companies led by investment firm IDG Capital came barely a week after Cincinnati-based LSI Industries acquired LED lighting manufacturer Atlas Lighting Products for $97.5 million. In a rapid string of international consolidations in the three months prior to that, Holland's Nordeon Group picked up both Lamp Lighting and Schmitz Leuchten; Philips Lighting acquired Luciom; Sweden's Fagerhult bought WE-EF Leuchten; and US controls company Leviton acquired lighting firm ConTech.

For those keeping tabs, that's at least seven notable acquisitions since December.

Go back over the last year and the scorecard is bursting: Nordeon picked up WILA in February 2016 and Vulkan a month later, then Lumenpulse bought Fluxwerx; Osram bought nearly half of Tvilight in November and Philips finally completed the long and winding sale of its Lumileds chip business in December

Are more coming this year? 

'I cannot exclude it. Our merger and acquisition activity remains strong,'  Nordeon Group chief executive officer Pierre van Lamsweerde told Lux

If Nordeon does land another buyout in 2017, it won't be alone. There are even rumours of a US/European tie-up of two major players from either side of the ocean. At one point, two Chinese companies were believed to be eying the whole of Osram, although that prospect has cooled since Osram CEO Olaf Berlien told analysts in February that he is not currently in talks with Chinese investors. 

What's going on here is nothing less than a classic push to consolidate by players in a fragmented industry as they strive to broaden their territorial and product scope as well as buoy their purchasing, operational, development and bargaining power, all otherwise known as 'scale.' There are hundreds of lighting companies just in Europe; not all can survive on their own in a market pressured more than ever by the costs, competition and confusion of how to profit in the new world of LED lighting, where prices have tumbled and products last a long time, virtually wiping out the classic replacement market as a source of revenue.

None of the acquisitions are going to have a colossal closing value. Lighting companies make things, an activity that tends not to attract high valuations these days the way non-manufacturers can, such as when social media company Snapchat floated for over $20 billion last week and promptly soared. Even car companies weigh in well below that, illustrated by the $2.3 billion that Peugeot owner PSA Group just paid for General Motors' Opel and Vauxhall.

But lighting companies are combining out of necessity. There are hundreds in Europe alone, and hundreds more around the world. Not all can survive on their own in a market pressured more than ever by the costs, competition and confusion of how to profit in the new world of LED lighting, where prices have tumbled and products last a long time, virtually wiping out the classic replacement market as a source of revenue.

Add to that the desire to have technologies for the fledgling Internet of Things (IoT), and the drive to acquire and be acquired is rampant. Many people in the lighting industry believe that the IoT and its smart lighting services and products could well be the industry's future, as the old business model of selling short-life dumb bulbs dies.

Looking to high-tech: Osram CEO Olaf Berlien said the sale of the LEDvance bulbs group helps the company's 'strategic realignment' into what he says is a 'high-tech'company. Here he peers at a smartphone that is communicating via Bluetooth to lights at Osram's introduction a year ago of its Einstone indoor positioning system. [Photois from Mark Halper].

Bigger is better

It also doesn't hurt that lending rates are at a low ebb, making it easier for acquisitive companies to muster the resources, although none of the acquirers acknowledge cheap debt as a primary force. 

Rather, first and foremost, they cite 'scale.' With LED technology now mainstream and subject to competitive pricing like never before, smaller companies are feeling the need to gain purchasing and manufacturing clout. That's the way one of the busiest acquirers,  Eindhoven-based Nordeon, sees it. 

'With the transformation to LED, there is creative destruction going on,' noted van Lamsweerde. 'Established players have come into more challenging situations because of this huge transformation that's not only a technology transformation but it's also the supply chain, it's cultural, it's design – everything's changing.  And that's exactly where we see the opportunity. What we do is we bring brands together. We leave them quite autonomous, but we help them to accelerate this transformation. We create scale. We believe in the nimbleness of those companies, that's why we leave them independent, but they need scale in terms of purchasing power, innovations, in terms of go-to-market, in terms of IT.'

Citing the formerly family-owned Lamp as an example, he noted, 'Lamp is a very well-run Spanish company, but they saw that they would need to partner up to keep being profitable. We can bring them scale in certain areas that I just mentioned.' No argument from Lamp, based in Terrassa near Barcelona. As CEO Ignasi Cusido said at the time of the acquisition. 'We have been looking to join a larger strategic group in order to further solidify Lamp Lighting’s future in the rapidly transforming lighting industry.'

The same business logic made sense to Schmitz, the Arnsberg, Germany specialist in office, retail, hospitality and architectural lighting that Nordeon acquired in December. 'Being part of the Nordeon Group will help us to be in a stronger position to grow Schmitz and accelerate innovation in a market that is demanding faster technology developments and experiencing increasing complexity,' said Schmitz CEO Christoph Schmitz. 

In both Nordeon acquisitions, Lamp and Schmitz gained one of scale's most important benefits: purchasing power.  The same holds true for LEDvance, now owned by three Chinese companies including LED components manufacturer MLS Co. Ltd., which will now offer lower chip prices than it had been to LEDvance, as Lux sister publication LEDs Magazine reported. MLS also owns US lamps and fixture maker Forest Lighting.

Likewise, LSI CEO Dennis Wells cited buying power in LSI's acquisition of Atlas two weeks ago. 'We anticipate significant cost synergies with this acquisition,' Wells said. 'Atlas has forged sourcing channels in Asia which we plan to utilize throughout LSI’s existing businesses. These sourcing relationships, along with additional cost savings that we have identified during our due diligence, are expected to benefit LSI in the near-term, while savings resulting from the elimination of private company expenses will have an immediate benefit.'

Geography lessons

Scale takes many forms that not only lowers costs but that can also widen geographic reach.

'Through MLS, we gain access to very cost-efficient and powerful LED components and will strengthen our market presence in Asia, especially in China,' LEDvance CEO Jes Munk Hansen said. “This supports the LEDvance strategy to expand our product portfolio, foremost in the areas of LED lamps, LED luminaires, and smart lighting. We look forward to pursuing the many new opportunities that the partnership with MLS brings.'

Geography was also on the mind of Schmitz CEO Christoph Schmitz. 'We can immediately benefit from Nordeon Group’s international footprint and rapidly expand in key markets such as UK, Middle East and the US,' he said.

And Fagerhult CEO Johan Hjertonsson gave a geography lesson as part of the explanation of his company's acquisition of German outdoor lighting company WE-EF in December.  WE-EF, based in Bispingen, Germany, had already spread its international reach into eight countries, but with Fagerhult, it is now part of an organisation that is present in about 20 countries.  And territorial expansion was only part of the story.

'They saw it was great for the WE-EF organization and the WE-EF brand and the people in WE-EF to join a larger group and therefore use the resources that are available in a larger group to further grow their company,' said Hjertonsson. Like with Nordeon and its acquisitions, Fagerhult is leaving WE-EF intact, allowing it to run 'completely independently,' he noted.

From the acquirers' side, not only do companies such as LSI, Nordeon and Fagerhult themselves broaden their own scale, but they also diversify their product lines. 

 

Smaller companies can gain instant geographic expansion when they join a larger company, they can offer the same advantage to their acquirer, as Lamp did for Nordeon.

 

WE-EF bolsters Fagerhult's outdoor presence, for instance. 'We do some outdoor lighting, but it's not a large part of our sales,' said Hjertonsson. 'Now with WE-EF on board it will be a large part of the group's turnover. It makes our foothold into the outdoor lighting area quite strong now, with a combined revenue of €100 million in outdoor lighting.'

Likewise, Nordeon, which started life in 2012 selling linear lights, has used acquisitions to expand its offerings. Lamp, Schmitz and WILA have added downlights, spots and other products that Nordeon can sell through retail channels.

Just as smaller companies can gain instant geographic expansion when they join a larger company, they can offer the same advantage to their acquirer, as Lamp did for Nordeon.

'They bring advantages to the group. We are not too strong in Spain, and we had no access to the Latin America markets,' said van Lamsweerde. 'They are very strong in Spain. So they are now bringing the products of the other group companies to Spain. They's also quite active in Latin America  where they are doing the same. So the companies are helping each other to grow faster.'  Lamp Lighting has subsidiaries in Mexico, Colombia and Chile. 

That all means more reach for other Nordeon brands, like Griven, Hess, Vulkan, WILA (ALL acquired since 2013)  and of course, Nordeon (the company's original brand), along with the newly acquired Schmitz. And it extends Lamp's distribution into new territories via the other Nordeon companies.

In a more nuanced benefit of scale, Nordeon's van Lamsweerde pointed out that as the company builds up through acquisition, it can more efficiently run internal information technology operations. Among the reasons: it gains in-house experts who can spare Nordeon the need to buy expensive external consulting for systems such as SAP enterprise software or for customer relations management (CRM) software.

Acquisitions R Us

For Nordeon, acquisitions are in its corporate DNA, as Nordeon is owned by a Dutch investment company called Varova. Utrecht-based Varova. started Nordeon in 2012 by buying operations from Philips. It's modus operandi is to grow via acquisition. 

In the same vein, the Chinese consortium that acquired Osram's LEDvance is comprised two thirds of investment firms, lead investor IDG as well as Yiwu State-Owned Assets Operation Center. Together with MLS, the three have roughly equal shares, with IDG having the largest slice, according to LEDvance.

Similarly, it was an investment company, New York City-based Apollo Global Management, that purchased 80.1 percent of Philips Lighting's Lumileds LED chip and automotive lighting group in December. That development ended an odyssey during which, at one point, Philips had agreed to sell Lumileds to yet another investment entity, led by China's GO Scale Capital, for $2.8 billion, a deal nixed by the Obama administration for national security reasons. (GO Scale was one of the entities rumoured to be jointly interested in buying Osram, along with Sanan Optoelectronics).

On the other side of the buying and selling coin, Philips itself recently picked up a company, Luciom, based in Colombelles near Caen in northern France. In that case, the primary driver was Internet of Things (IoT) technology. Luciom specialises in visual light communication (VLC), which embeds data in LED light waves. It is emerging in both one-way and two-way forms. One-way transmission deploys indoor positioning technology; in some early trial uses, retailers such as Target in the US are using it to track shoppers around physical world stores and offer them discounts. In its two-way form, commonly referred to as Li-Fi (for light fidelity), VLC provides full-fledged Internet transmission. 

Li-Fi is a potential bonanza that can help offload and complement WiFi by using the wide band of light frequencies rather than the more constrained frequencies of Wi-Fi's radio spectrum.

Li-Fi is a potential bonanza that can help offload and complement Wi-Fi by using by using the wide band of light frequencies rather than the more constrained frequencies of Wi-Fi's radio spectrum. It faces a chicken-and-egg conundrum: costs are too high to offer it as a general consumer technology at the moment, but they will tumble once the technology catches on and production economies kick in.  

Tom van den Bussche, president of Paris-based technology consulting firm Toric, says that while it costs about $25-to-$30 to embed WiFi and other radio frequency technologies into laptops and gadgets, it currently costs over $1,000 and even $2,000 to do the same with LiFi. That helps explain why, for example, Edinburgh-based LiFi pioneer pureLiFi has yet to adequately miniaturise gadget-side kit. It still uses dongles rather than gadget-embedded electronics, such as at its public demonstration at LuxLive2016 in London late last year.

Philips Lighting has already relocated Luciom and its eight people to headquarters in Eindhoven, and is expected to invest to help bring Li-Fi costs down so that the technology can scale up. Philips is providing few details. A spokesperson simply noted that, 'We are committed to innovation and continue to explore new and emerging technologies.' Philips is believed to have paid less than €10 million for Luciom, in an agreement that possibly included settlements of patent disputes. Neither party would elaborate.

IoT: Partner v Acquire

In another example of an IoT-driven acquisition, Germany's Osram last November purchased a 47.5 percent share of Amsterdam-based intelligent streetlight control company Tvilight, which specialises in sensors and software for streetlight management and has helped to outfit the area around Berlin's Bundesplatz train station with smart lighting.

The Tvilight acquisition was an example of how Osram CEO Olaf Berlien is trying to reshape Osram into what he calls a 'high-tech' company, building up smart lighting expertise such as in another area, indoor-positioning, where as LEDs has noted, Osram is even selling Bluetooth transmitters. Berlien last week even described the selling off of the relatively low-tech LEDvance lamps operation as  “a milestone for Osram in its strategic realignment.'

And in an early notable case of an IoT acquisition nearly two years ago, Atlanta-based Acuity purchased VLC specialist ByteLight. 

But while some observers have expected more acquisitions in IoT, lighting bosses are proceeding cautiously, and have so far demonstrated more of tendency to partner with, rather than acquire, technology companies.

'We are constantly evaluating that,' said Fagerhult CEO Hjertonsson. “It's quite a new thing to the industry with IoT and connectivity. So it's not that easy to say exactly how it will play out. But it will have a large effect on the industry, that's for sure. Exactly what shape or form, it's too early to say.'

Fagerhult is focused on 'organically' growing its IoT capabilities, but that could change. 'These are quite costly technologies to implement, and I think that size matters in terms of resources to handle that and invest in that,' Hjertonsson said.

Nordeon has a similar outlook. It has avoided IT acquisitions to date.

'We are consciously not acquiring IoT technologies ourselves because we believe the game is still very young,' said van Lamsweerde. And there are so many different technologies it's too early to bet on one technology. It's too early to make a specific technology choice.'

An eye for partners: Cisco CEO Chuck Robbins says he's looking for alliances but not acquisitions in lighting. Cisco is already working with dozens of Power over Ethernet lighting specialists.[Photo is from Mark Halper].

That's not to say Nordeon is not interested in the IoT. 'We absolutely are,' says van Lamsweerde. It is taking the partnership route, working closely with Finnish controls company Casambi Technologies, which provides Bluetooth-based smart lighting control systems that allows users to control LED lighting with their phones and gadgets. Nordeon prefers Bluetooth over VLC technologies because Bluetooth, as a radio technology rather than one based on light, does not require a user to keep a phone in direct line of sight with the light source. 

'You don't have to take the phone out of your pocket to be able to communicate,” he said. “Furthermore bluetooth is a proven technology established in countless number of devices worldwide.' 

Indeed, lighting companies have hit a high gear in chasing IT partnerships.  In February, Philips Lighting announced a bevy of new IT buddies including software giants Microsoft and SAP in an effort to advance the indoor positioning business through an initiative called the Location Lab. The move echoes a strong partnership push by Philips rival GE, where the newfangled lighting division — called Current, powered by GE — has over the last year signed a number of IT partners in indoor-positioning and other areas.

Could Google buy the industry?

Some industry watchers have wondered whether an IT company such as Google or Apple might purchase a lighting outfit. Barclays analyst David Vos doesn't think so. 'It's an idea that's been around, but so far nothing has materialised,' he noted. 'I'm not really sure whether there's any industrial logic there. What would the IT company really get by doing that? Presumably the angle would be around smart lightbulbs, the stuff that people would put in their homes and connect things. If they wanted to bring out a product like that, the hardware companies are pretty adept at making those things themselves. We don't need to teach Apple how to assemble a consumer electronics product.'

Vos pointed out that IT-based consumer companies simply need to work with lighting companies to assure compatibility with their products, such as what Amazon has done in facilitating lighting connections with its Alexa/Echo voice-control technology, which works with bulbs from Philips, LIFX and others. 

One area where it might makes sense for an IT company to snap up a lighting company would be Power over Ethernet, the technology which routes both electricity and data to LED lighting via low voltage Ethernet data cable, typically known as 'Cat 5' and 'Cat 6' cable. For PoE to work, LED luminaires must be modified. A number of smaller lighting companies such as NuLEDs, Innovative Lighting, Platformatics and others specialise is such tailored offerings, as do larger companies such as Philips and Cree, to name a few.

San Jose, CA-based networking giant Cisco has been making a concerted push to tie lighting into IT networks via PoE. They could be a candidate to acquire a company, Cisco historically is an acquisitive company, although Cisco CEO Chuck Robbins last summer poured cold water over the idea, telling Lux sister publication LEDs Magazine that for lighting, he prefers partnering. Cisco is working with dozens of lighting specialists, such as Philips and Cree.  One of Cisco's partners, Carlsbad, CA-based NuLEDs, early this year began providing PoE-enable luminaires to an art deco office building in Fort Worth, Texas

In one recent acquisition with a flavour of IT moving in on a lighting company, Melville, NY-based controls and automation company Leviton in December acquired Chicago-based lighting company ConTech. The acquisition came about a year-and-a-half after Levition acquired Anaheim, CA-based lighting company Intense Lighting. While Leviton is not a classic IT company per se, it straddles the line between lighting and IT, traditionally offering electrical wiring, controls, automation and increasingly crossing over into IT networking. It is also building up IoT capabilities.

'Smart lighting is another area of focus for Leviton, and it is actually an industry that the company has been a player in since Leviton’s acquisition of Home Automation, Inc. in 2012, Leviton president Daryoush Larizadeh told Lux. 'Now, through Leviton’s Energy Management Controls & Automation business division, Leviton has several strategic partnerships with technology, 'IoT' and smart device companies to expand our offering of smart lighting controls. Right now, we are focused on making these partnerships successful in delivering smart lighting control products and solutions to our customers.'

'Right now, we are focused on successfully integrating ConTech Lighting into the Leviton portfolio, but we are considering acquiring more lighting companies in the future.'

Daryoush Larizadeh - Leviton president

Stay tuned for more

However you want to to categorise Leviton, they, like other companies in the lighting industry, continue to look into more acquisitions.

'Right now, we are focused on successfully integrating ConTech Lighting into the Leviton portfolio, but we are considering acquiring more lighting companies in the future,' said Larizadeh.

'Acquisition generally is an important part of our strategy,' echoed Fagerhult's Hjertonsson, who also emphasised that 'organic growth is equally important.'

With an urgent desire for scale, a need for Internet technologies, a quest for new geographies, markets, services and business models, and with lending rates low, 2017 is sure to be a busy one for lighting industry consolidation. The possible combinations range from the A to Z of vendors.  Consider that a clue to the rumoured whopper deal in the works.

Comments 1

These are desperate ploys by managers with little imagination. Also, how much did these managers pocket on these deals? I would be glad to sell a division to worried Chinese investors with cash to park.

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