Exploring valuation and exit strategies for SSL companies in connected lighting

Leading up to Strategies in Light and the co-located events The LED Show and Lightspace California, we have discussed connected lighting a few times, but there are many angles to consider when connecting the dots for smart lighting technology and applications. Recently, we heard from the Department of Energy on how to capitalize on research and development to drive connected, smart lighting into commercialized products and services. Several keynote speakers will address transformation in the industry and integrated networking technology as a catalyst to develop the solid-state lighting (SSL) market’s offerings for Internet of Things (IoT) systems. But what about the business model and financial opportunities? How will lighting companies differentiate themselves in order to attract partnerships and execute potential acquisition and valuation strategies? During The LED Show track, Mike Gagnon, president of strategic advisory services firm Alumage Advisors, will describe business strategies for SSL providers to build a brighter future on the foundations of IoT in his presentation “Increasing market value & exit opportunities in connected lighting.” — CARRIE MEADOWS

Market values among pure-play lighting companies such as Acuity, LSI Industries, Dialight, and others have declined approximately 30% during the last 12 months. No doubt, slowing growth rates in the LED lighting and controls market, compounded by oversupply of lamp, luminaire, and LED suppliers are contributors. In the meantime, 2017 experienced modest merger and acquisition (M&A) activity, such as Osram/Digital Lumens, Leviton/Birchwood, Harbour Group’s acquisitions of ILP and Green Creative, among others, at non-disclosed (i.e., modest) valuations. Consolidation trends are similar in Europe, with an excellent treatise on the subject by LEDs Magazine’s partner Lux in early 2017.

Going forward, one should expect the Acuitys and Schneiders of lighting and energy management, respectively, to dominate with scale, more M&As and improved market caps. Additionally, increased participation from IoT-centric companies seeking lighting capabilities, as well as private equity roll-ups of complementary, differentiated small-to-mid-sized lighting companies, should continue. Nonetheless, sellers will continue to exceed buyers.

During the session “What else can I do with connected lighting?” my presentation will examine a subset of planning and execution processes associated with best-in-class performance and companies. Following is a sampling of suggested strategies that could inform these IoT-centric business moves.

LEDs Magazine will continue its countdown to Strategies in Light with more industry insights here at ledsmagazine.com. You can find details on the conference program, speakers, exhibitors, and more at strategiesinlight.com.

Differentiation in one’s niches

Increasing shareholder value in any financial climate or business cycle is the primary objective for every CEO and senior management team. With hundreds of $10–100M (million) lighting suppliers competing in a land of Goliaths, it’s all about consistently winning via differentiation and an unrelenting focus in one’s niches, with resulting leadership in sales, profitability, and value.

As a long-time practitioner of Porter’s Competitive Positioning¹ and 5-Forces² principles in developing company strategies, an adaptation previously published on LinkedIn applied to a differentiation-focused strategy is particularly relevant to my discussion. (You can find resources covering these principles at the reference links down below.)

We must embrace the diseconomies of scale where “the focus and cohesion of small, smart teams can build better products than a larger team, in reacting quickly and nimbly to emerging trends”³. As in every other industry, the alternative to niche market differentiation is “stuck in the middle,” where profits are minimal and slow death ultimately ensues. If one accepts that only the top two or three companies serving a market or sub-market generate 80% of the profits, the mandate is clear.

As baselines of comparison, we have profiled more than 250 lighting ecosystem manufacturers across 60 business dimensions. Furthermore, as it pertains to best-in-class smart lighting product performance, 40 product features from more than 2500 “high-lumen-output” products have been compiled and compared since 2013.

Combining one’s own market data and a company’s core competencies with proven strategic and operational practices, there exist valuable nuggets of information from which roadmaps can be developed for smaller companies to survive and thrive via a differentiation-focused strategy.

With a focused strategy, there clearly exist roll-up opportunities for companies demonstrating >$10M EBITDA with a solid growth path to $25M EBITDA, or in smaller companies 25–50% CAGR at 20%+ EBITDA, as cited by other speakers during prior Strategies in Light Investor Forum events.

Strategy enhancement and implementation

In addition to applying the aforementioned Porter’s Competitive Positioning or similar process of choice, key elements of one’s core strategy should be reflected in the company’s Mission, Vision, Value Proposition, and Qualities & Values statements. They are meant to serve as guidelines to prevent straying from the plan, and reviewed annually or as warranted by fundamental shifts in strategy and business conditions. These proclamations also tell our stakeholders (employees, investors, channel partners, suppliers, and the like) who we are and where we’re going⁴.

Similarly, drilling down into both corporate and departmental SWOT analyses are highly recommended next steps in defining one’s core competencies and opportunities for best-in-class performance. Applying the KJ-method⁵ to SWOT analysis — outlining your Strengths, Weaknesses, Opportunities, and Threats — has proven to be a highly-effective tool with the added benefit of achieving consensus among all participants.

Finally, transferring all of the above into a “who, what, where, when, and how” (4WH) action plan, with specific and measurable objectives, will facilitate success in achieving annual goals throughout the company.

Summary

Strategies in Light speaker explores valuation and exit strategies for SSL companies in connected lighting

Identifying and executing differentiated, focused strategies with resulting leadership positions in one’s chosen niches is a proven path to increased market value and success among the Goliaths in any industry. Such $10–100M lighting ecosystem suppliers will be rewarded with growth and profitability metrics that attract acquirers in any climate, including consolidation. And the extent to which one’s best-in-class capabilities or differentiating attributes can be leveraged across an acquirer’s operating divisions will help propel your company to the top of the list, especially with the current advance of so many firms into the IoT and connected lighting arenas.

Several of these topics as well as partnership opportunities in connected lighting will be presented during the upcoming Strategies in Light Conference.

MIKE GAGNON serves as president of Alumage Advisors, providing connected lighting strategies and financing/M&A/CEO advisory services to executives throughout the SSL ecosystem.