Merger Mania to Hit Paper Shredders?

Entrepreneurs have gravitated toward the document destruction industry in the past few years, but the movement toward consolidation in this segment has gained steam.

That’s the opinion of investment banker Michael R. West, who spoke to attendees of the National Association for Information Destruction (NAID) Conference in Orlando, Fla., in mid-May.

West, whose company Starboard Ventures LLC, Greer, S.C., has helped arrange acquisitions within the document destruction business, says that some small shredder firms may have already missed their best opportunity to sell their companies at their peak value.

“It’s hard not to make money in this business right now,” West said of the document destruction industry. But, he warned, competitive pricing competition is beginning, as is competition from growing national firms such as Iron Mountain Inc., Bostson. “In reality, a lot of people in this room will not be here in four years,” he predicted, after mergers and a competitive marketplace set in.

West said that many service industries claim their market is unique or their service does not lend itself to larger, national management, but countered that he is seldom persuaded by these arguments. “There are no protectable niche markets,” he stated, adding that industries can take 20 to 25 years to consolidate before reaching the point where a couple of players (such as Coke and Pepsi in soft drinks or Alcoa and Alcan in aluminum) dominate the market.

As consolidation sets in, “size begins to matter,” said West. “Major players emerge, pricing is more competitive and profits smaller,” during the consolidation phase until a final “Balance and Alliance” phase is reached.

In this stage, “a very few large companies protect their market positions,” noted West, often to the point where the government might take an interest from the anti-trust perspective.

According to figures offered by West, cash paid for acquired document destruction companies may have peaked as early as 1999 after three years of heavy activity.