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Electronics recycling industry consolidation trend heats upClick to Enlarge

A consolidation trend among electronics recycling companies has spurred several notable acquisitions recently, with more likely to follow. This year, Arrow Electronics, a $21 billion sales electronics distribution company headquartered in Inverness, Colorado, acquired Asset Recovery Corporation, a $20 million sales electronics recycler based in St. Paul, and TechTurn, a $50 million sales Austin, Texas recycler. Avnet Inc., a $26 billion sales electronics distributor based in Phoenix, acquired Austin-based Round2 Inc., a $40 million e-recycling firm.

Those are just some of the larger and more recent consolidations. There are still more than 1,500 firms in the electronics recycling field, and it remains highly fragmented, with most firms generating less than $1 million per year in sales. The number of firms is likely to decline, experts say, thanks to the confluence of several powerful forces on the e-recycling field.

Acquisitions are hot right now, in part, because corporations are sitting on lots of cash that isn’t earning much because interest rates are low, and with business and consumer activity still soft it’s often easier and faster to buy companies than to grow internally, said Dave Karnofel, managing director of business development at New York investment banking firm BCMS Capital Advisors.

“The capital in the hands of companies today is probably greater than it’s been in the past 25 years,” Karnofel said. “That capital has created pent-up demand for large companies trying to expand their business.” Another element in the scenario is the ability to borrow money for acquisitions at very low interest rates, he added.

Acquirers are looking at e-recycling because of the growing number of states that bar disposal of electronic waste in landfills or otherwise encourage recycling, said Andy Lipman, managing principal at Westport, Connecticut, investment banking firm Intersection LLC. In particular, he points to regulations requiring large manufacturers of computers and other electronic devices to take responsibility for where their products wind up.

“All these guys have to find service providers to recover the e-waste stream,” Lipman said. “These very large companies prefer to do business with larger businesses that have stronger balance sheets and multiple locations. That’s a primary driver.”

What acquirers want

When acquirers go shopping, they’re looking for companies with significant geographic reach. “Having a footprint that covers the large MSAs is important,” Lipman said. Different states have different regulations, and manufacturers would prefer to have one or a few companies to deal with that can shield them from the complexities of varying local rules.

It’s also important for companies to offer a range of services. E-recycling may include end-of-life processing of an obsolete computer to recover commodities, but it may also involve refurbishing less dated machinery for resale and reuse, Lipman noted. “So I think having a breadth of capabilities is important,” he said.

Unfortunately, small niche players that tend to serve one or a few communities with specialist services dominate the e-recycling industry in numbers. So there aren’t many desirable acquisition candidates around. That’s just one of the obstacles acquiring companies face when going on a shopping spree.

Consolidation’s limits

Profitability is a significant issue for would-be acquirers, said Jim Taggart, CEO and founder of ECS Refining, a Santa Clara, California, end-of-life electronics recycling company that recently received a significant investment in order to expand its network of processing plants in California, Texas and Oregon. Small, family-owned recycling operations may see their profit margins vanish when they are integrated into larger organizations, he said.

The industry also suffers from over capacity, with one study showing average capacity utilization is 57 percent. The shortage of materials is largely due to exporting e-waste overseas, Taggart said. If large electronics manufacturers require recyclers to show that they’re not exporting, or if the U.S. Congress passes legislative restricting such exports, that may help alleviate the over-capacity problem.

However, at the same time, electronic devices are shrinking in size dramatically as laptop computers replace desktop PCs, and tablet computers and smartphones replace laptop computers. The falling average size of electronic devices may tend to reduce the tonnage of the entire stream, despite shorter replacement cycles.

Finally, in states and cities that offer financial incentives for e-recycling much of the profitability of the existing e-recycling companies may be made up of those incentives. Budget pressures make the continuation of such incentives uncertain, and that makes some companies’ continuing profitability suspect.

In an industry dominated by small, unsophisticated operations with limited capability and reach, would-be acquirers have to spend a lot of time looking before they find something they want to buy, Taggart said. The time and effort spent to acquire one $50 million company is far less than would be spent to acquire ten $5 million companies, he noted, and there are probably not more than five $50 million companies in the field. “When you come right down to it, there’s not a lot of large enough companies that are attractive for acquisition and available,” he said.

Consolidation outlook

Despite the significant acquisition activity to date, and the complications surrounding additional acquisitions, it’s expected that this trend will continue for the foreseeable future. E-waste has been the fastest growing portion of the waste stream in recent years, the pace of technological advancement is growing so that more devices become obsolete faster, security worries require more and more reliable data destruction on old devices, and environmental regulation is getting ever-stricter.

Karnofel suggests that the most likely scenario has e-recycling winding up with three dominant players. This is what happens in a typical consolidation in most industries, he said, although it could take several years and several rounds of acquisitions for it to play out.

“It’s going to happen,” said ECS Refining’s Taggart. The major driving force is that big electronics makers want to deal with big electronics recyclers who can supply all their needs in all their locations. “That is encouraging the development of national capabilities,” Taggart said. “I know that’s our strategy. To get to a national footprint and have the same capability nationally that we do regionally.”