Beware of the Ides of March
In the Shakespeare play “Julius Caesar,” the line “Beware the ides of March” foretells an upcoming adverse situation, at least for the title character. The phrase has continued to be used in many other pop culture references to imply a fall from power (including an episode of The Simpsons, of course). This phrase seems applicable and timely to our March “Ask Kevin Anything” question.
There seem to be many companies in the parking industry being sold or merged at this point. Is this something we should get used to or just a side effect of COIVD?
Pondering, on the Pacific Coast
Acquisitions and mergers have been occurring in the parking industry for as long as parking has been an industry. A quick review of a tradeshow booth layout from even a few years ago reveals a list of companies that no longer exist or are no longer doing business in the industry. Going back a few more years in the late ’90s, the continued growth and company consolidation of Central Parking led to an anti-trust lawsuit from the U.S. Department of Justice after the merger of Allright Parking, due to the combined size of the new entity. Ironically, years later, Central Parking merged with Standard Parking (among others) to create the large, publicly-traded parking operator SP+.
While mergers and acquisitions have been a part of the parking industry for a long time, COVID sems to have accelerated the trend. The ripple effect of a dramatic drop in parking usage first affected parking operators and then technology providers. Technology companies using a per-transaction pricing model were especially hard hit as many had a large amount of their top-line revenue contributed by transactional payments. Not surprisingly, when people stop parking, they stop paying for parking (or getting tickets for not paying for parking), and these companies’ revenue models collapsed. For many of these companies, they have a dual problem. They have raised large sums of investment money based on the prediction of continued growth. Many of these companies are not viable without continued outside investment, and this investment is difficult and expensive to get when growth levels drop. Once you start taking this type of growth capital, it isn’t easy to transition into an independent company focused on profits instead of growth.
Furthermore, these companies typically have no choice but to be sold at some point to give investors a return equal to their expected levels for this type of investment. (For early investors, they expect a 10x return on their invested cash.) I believe this trend will continue, as many companies in the parking industry who have this outside funding model at the heart of their business plan work to find a way to exit and make good on the investment.
Additionally, several other characteristics of the parking market push companies towards consolidation. First, there are few regulatory or market barriers that make it difficult to start a new parking company. Many people without experience in parking assume, for some reason, that parking is not nearly as complicated or difficult as it is and believe they can come into the market and “fix it” quickly. This mistake tends to create more companies than the market can bear long term for a particular technology type. As companies work to establish dominance within that segment, other providers are either acquired or are shut down.
Another characteristic of the parking market that causes company consolidation is how parking technology is procured. The purchasing process is typically long, slow, political, and doesn’t happen often (We have discussed improving procurement processes in a previous Ask Kevin Anything column.) This broken process encourages acquisitions to rapidly add customer accounts in large numbers instead of winning them one at a time. Additionally, when completed correctly, a combined company will have lower overhead and increased margins than the separate companies due to eliminating duplicate expenses.
The final characteristic causing ongoing consolidation is the amount of outside capital looking to invest in the parking market. Over the past five years, between $1-2 billion dollars have been invested in the overall parking market. The reasons for this would fill another column, but investors tend to follow trends, and more investment capital will continue to make its way into the industry. This new capital will allow companies to acquire that investment to buy companies that are unable to do the same.
While the trend of higher than usual consolidations will continue for at least the next 1-2 years, there are overall positives, in my option. First, most mergers don’t work. According to the Harvard Business Review, between 70 to 90 percent of mergers and acquisitions fail. The reasons and scope of failure vary, but most deals never deliver the initially desired value. However, in many cases, these failures create new companies (especially for parking operators) that are better because of what they learned during their misadventures. Just look at all of the companies created by those who left Central Parking because of an acquisition. I predict the same thing will happen with former Reef Parking alumni. Ironically enough, many of those companies will later be acquired by the next big roll-up, and the cycle will start again.
In the meantime, newer companies with experienced teams tend to improve customer service levels, innovation, and competition. They cannot rely on size or reputation to smooth over problems. As such, these companies must try harder, innovate faster, and respond to customer feedback to succeed. Due to this, most customers are better off with those newer companies than staying with their current vendors. Ironically, many people in the parking industry fear using newer companies because they are unsure if they will survive. However, because people are worried about using them, early sales are slow, causing companies to raise money to continue the business. This investor capital causes a company to eventually sell to repay their investors, which causes issues for customers who now are working with a much bigger company that provides them lower levels of service and innovation.
Overall, the consolation trend is driven by the parking industry itself and not only by outside forces. If more people in the industry would embrace the positives of the change brought on by newer companies and leverage the innovations provided to improve their operation, both the customer and the company would thrive. This change includes replacing existing vendors who do not provide the level of service or performance promised or reasonably expected. Many of the larger companies bet, and are typically proven right, that most customers will never leave once you get them installed, no matter how you treat them. This condition makes it very difficult for new companies to break into the market and create a lasting business without investment and later acquisition. Take care of good companies and they will last long enough to take care of you.
Thanks for the question.
If you have a question you would like answered in this column; please send it to me at email@example.com
Additionally, if you are a customer dealing with the fallout of your vendor’s merger or a company leader going through or considering being acquired and would like some insights, please reach out. I would be happy to have a direct conversation with you about the process.