But now that his dad owns a nice chunk of a company that Wall Street currently values at $405 million, well, all of sudden, the industry doesn’t seem that bad a place after all.

“If someone had told me a few years ago that there would be four consolidators buying up independent HVAC businesses, I would have thought they were crazy,” said Abrams, president and chief operating officer of one of those consolidators, Service Experts Inc.

That’s not such a crazy notion today. Abrams takes it seriously and so do his counterparts at three other consolidators — American Residential Services; Comfort Systems USA; and Group Maintenance America Corp. To date, the four companies have bought contracting businesses with collective sales of nearly $1 billion.

And almost 400 HVAC contractors took it seriously enough to spend a weekend in Dallas last May to hear what the consolidators had to say at a special seminar sponsored by the Air Conditioning Contractors of America.

Despite their apparent quick gains, the consolidators still have plenty of work cut out for them — that $1 billion aggregate represents only a sliver of the $40-plus billion that each is after. But it’s the potential for substantial gains in market share in such a large, and largely fragmented, business — some 50,000 independently owned businesses — that has attracted plenty of Wall Street money to the HVAC industry, as well as plumbing, electrical and appliance services. Three of the consolidators are publicly traded, and the fourth, Group Maintenance, plans to go public next month.

“If consolidation works in this industry, and we think it will, then it will work big,” said financial analyst Mark Hughes, whom we met at the seminar. “The maintenance, repair and installation segment of this business has remained virtually untouched by deep-pocket acquirers.” Hughes, we should note, is far from a disinterested party; his firm Equitable Services Corp. underwrote the initial public offering for Service Experts.

Although consolidation may be new to this industry, it’s old hat to the overall world of commerce. Consolidation is a proven strategy in industries ranging from waste disposal to funeral homes to office products. Many of the great historical names of business such as Rockefeller, Getty and Ford were consolidators who used low-cost capital, i.e., stock, to acquire competitors, retain and incentivize existing management, import best practices from other operations, reduce costs through scale economies and rapidly increase earnings per share.

Not Just HVAC: Much of the consolidation fever has been felt initially in the HVAC industry. Two of the consolidators say they’re happy to stay put in the HVAC industry. It’s easy to see why. Smith Barney pegs the plumbing installation and services business at $11 billion. While not spare change, it pales next to the $25 billion heating and a/c installation, services and replacement business.

But what’s driving the action is bound to eventually filter down to plumbing. For one thing, the stake Wall Street’s put its money on isn’t necessary the “HVAC business” or the “plumbing business.” Rather it’s the much larger “residential services” business. For example, consolidator American Residential Services (ARS) may have as its founders several high profile air-conditioning companies, its stated goal is to be a national one-stop-shop for residential HVAC, plumbing, electrical and appliance services, both for new construction and the aftermarket repair/replacement/remodel segments. The company plans to add new service lines at existing locations until all operations offer the gamut of residential trades. The company estimates that just rounding out the founding companies’ compliment of offerings could almost double their revenues.

Retail Influence: Beyond this larger market, Wall Street is keen on profiting from the retail-type influence that is reshaping the HVAC industry. Two–thirds of air-conditioning shipments are for replacement of old units, and the industry is in the midst of a long-term replacement cycle. In addition to units simply wearing out, energy efficiency is also a key factor in many consumer’s decision to replace even a relatively new system. Today’s units may be 50 percent more efficient than equipment installed as recently as the late–1980s.

“Consumers are forced to play Russian roulette with the Yellow Pages in these circumstances,” Hughes explained. “The HVAC industry has largely evolved from a contracting to a retail business. We think there’s a large segment of the home-owning population that will be willing to pay more for services that are provided by well-groomed, uniformed, communicative and competent personnel who are backed by quality guarantees from a national, public company.”

Service Experts, for one, goes to great lengths to maintain a quality image through strict appearance standards for employees and their vehicles, the use of surgical booty carpet savers to protect customers’ homes, money-back guarantees, employee drug testing and extensive training of techs and salespeople.

“The company has abandoned the typical contractor mindset, with its focus more on the job and not the homeowner, in favor of a progressive, customer service orientation,” Hughes said.

Most every other important retail sectors are dominated by large, national chains. If the HVAC industry is on its way, plumbing can’t be far behind. Plumbing services are clearly becoming a consumer-oriented sale. According to the Plumbing Manufacturers Institute, 75 percent of the kitchen market and 65 percent of the bath market now consist of remodeling rather than new construction.

Utility Partnerships: Another factor promoting the emergence of four consolidators at this point in time is the increasing interest of deregulated utilities and other large-scale operators, for that matter, such as Sears and Home Depot to offer residential services to preserve and maintain their coveted residential customer bases.

Far from viewing this as a threat, the consolidators are poised to treat these outsiders as partners. In fact, one component of ARS’ strategy is to provide outsourcing services for utilities. Typically, most of the work is currently subcontracted to local independents. Understandably, these large businesses would prefer dealing with one large partner than the current hodgepodge of numerous independent contractors, a number of whom invariably damage goodwill with poor quality work. Other similar outsiders anxious to partner with a national consolidator would be home improvement companies and insurance companies for disaster repair services. Interestingly, ARS has already been chosen by the state of South Carolina as its preferred HVAC vendor in natural disaster situations.

Last, but not least, limited exit opportunities for owners play into the favor of the consolidators’ acquisition efforts. All-cash sales aren’t what the consolidators have in mind.

“We want your customers, first and foremost,” Abrams said. “But we also want your infrastructure — your management, talent and employees.”

With a combination of cash and stock, the consolidators need the former owners to stay put — and primed to gain substantially by an increase in the publicly traded stock. That’s a dream come true for a industry that has had few sources of liquidity when it came time to sell.

“I don’t make as much as I did when I run my own company,” said Elliot Sokolow, who was one of the founding members of ARS, and now serves as the company’s director of southeast operations. “But I stand to make much more money by increasing the revenue of ARS.”

Once a transaction is completed, the former owner’s task boils down to increasing the all-important earnings per share of this new company. Earnings per share is the most important indicator to Wall Street in determining whether to reward shareholders with higher stock prices. The consolidators stand to materially improve margins post-acquisition through purchasing power and professional management. ARS, for example, believes that it is now the largest buyer of residential HVAC equipment in the country. As a result, the company has already reached discount agreements with Carrier Corp., the leading supplier of air-conditioning and heating equipment, and Inter-City Products, the third largest supplier of such equipment.

Professional management is a nice euphemism for cutting redundant overhead costs, such as duplicate advertising and employment. ARS, for one, has a “management council” comprised of its founding members who tour each ARS site and determine where efficiencies and savings can be realized.

Hub and Spoke: Keep in mind that a classic consolidation strategy is referred to as “hub and spoke.” A hub operation would be a well-run, market-leading operation in a new geographic area. At least in ARS’ case, these companies would be within a service area population of at least one million, with climates spurring heating and cooling demands, and revenues of $5–$25 million. Meanwhile, spokes would be smaller operations between $1–$10 million in revenue, which could be integrated into the hub for that particular area. Consolidation theory made reality means eliminating overhead expenses while pooling other resources to achieve more efficient operations.

Take a look at what ARS accomplished with this strategy in essentially one instance by integrating A-ABC (a spoke), into Crown Services (a hub). ARS estimates that it has already saved $1.15 million in annual savings at Crown, which had 1995 revenues of $19.1 million. Much of these savings resulted from equipment purchasing, pricing strategy, truck leasing and employment cuts. Meanwhile, at A-ABC, the company saved more than $1 million on $8.7 million in 1995 revenue — a dramatic margin improvement of 12.4 percentage points.

None of this means that consolidation will put an end to independent business. “This industry won’t be consolidated in our lifetime. I guarantee it,” said Fred Fierra, chairman, chief executive officer and president of Comfort Systems USA. For example, the waste hauling business has been undergoing consolidation for the past 30 years. Yet from the 11,000 independents who existed at the start, more than 9,000 still remain today.

But it certainly adds to the dilemmas of the independent business operator. Abrams in particular painted a less than optimistic picture for mid-sized companies in the $3-$5 million range. Not only can consolidators run their operations more efficiently, but their larger size means access to better technology in the future.

“What stopped us in the past from technological advancements was the fragmentation of our industry,” he added. “No one company could take the lead and shoulder the risk.”