VARs Catch The Eyes Of Investors12:00 AM EST Mon. Apr. 02, 2007
It's a good time to be a solution provider as private equity firms and other channel players continue to climb over each other to invest in VARs.
Just two weeks ago, Affiliated Computer Services said that investment fund Cerberus Capital Management wants to help take the solution provider private in a $5.9 billion buyout. The same week, CRN learned that solution providers Presidio and Solarcom were merging to form an $800 million mega-VAR named Presidio Networked Solutions.
A wave of consolidation has been occurring for two years or more, but the number of inquiries and the number of VARs listening have increased dramatically, executives said.
There's a multitude of reasons: Investors are flush with cash, an older generation of solution providers is looking for an exit strategy, and VARs recognize the better buying power and efficiencies that come from running a larger operation. It's a scenario VARs say they haven't seen in a long time.
When David Gulian was looking to start a solution provider business six years ago, he couldn't even get an investor to return his phone calls. So he and a couple co-founders scraped together nearly $400,000 and did it on their own. The group opened InfoLogix in Hatboro, Pa., to focus on the health-care industry.
"We couldn't raise money back in 2001. It was a bad time with the tech bubble burst. There was a void in the market that wasn't being served, but we had limited resources, limited cash," Gulian said of the company's modest beginnings.
Fast forward to 2007 and Gulian is CEO of a $60 million publicly traded company. He has a private equity partner and plans to achieve a billion-dollar market capitalization with $400 million in revenue within four years.
"We're finally being identified for the value we offer," Gulian said.
And the InfoLogix story is not the only one.
Alex Solomon, co-founder and co-president of Net@Work, a New York-based solution provider, said he gets three voice mails a week from private equity firms.
"It's incessant," he said. "They want to put their money where there's growth and stability and they see emerging resellers as an opportunity. We're getting bigger and bigger and they want to be involved."
But Solomon isn't interested in selling right now. Mainly because he's too busy making acquisitions himself. Net@Work, a Sage Software specialist, just closed a deal to acquire Spitz Software, an ACT solution provider, and is finalizing contracts to buy an Acc-Pac dealer in Connecticut. Last August, Net@Work acquired Eagle Consulting Group, another Sage VAR. He has grown the business to $14 million and is looking for more.
You don't need a nine-figure revenue base to buy another company, said Solomon. He made his first acquisition when the company's revenue was less than $10 million and he thinks the company could top $15 million this year. That makes him a big fish in his space.
"There are very few guys bigger than $20 million. That's a mega-VAR in the business applications market," he said.
That's why Net@Work continues its hunt for business application solution providers, Solomon said.
"Smaller resellers have to be larger or they'll be out of business. It's over. An [end user] no longer needs one company for accounting, one for integrated CRM, one for its e-business. Having four or five companies is crazy to manage if you're an SMB. You go to one company to handle your entire technology. It reduces your total cost of relationships and you have one person accountable. We're all seeing that happen," Solomon said.
John Varel, CEO of FusionStorm, also has been on a spending spree. He's acquired six companies over the past four years to build the San Francisco-based company into a $400 million VAR. And he's not done yet.
"We will be growing more, unless somebody bigger acquires us. Both integrators and equity firms are calling," Varel said. "You can't survive if you're small. You can't get the vendors' attention. This is the year we see the big ones [mergers and acquisitions] happen." In other words, money talks.
"Equity firms are saying they are very aggressive. And more and more of them are calling. They think they are getting a great buy. They look at our multiples and want to take a minority stake and help us grow to become a billion- dollar company," he said.
These are very heady times. While FusionStorm is still in acquisition mode, it would also consider being acquired, Varel said. "If someone wants to come in and buy us at the right value, we'd consider it, he said.
Next: No Dot-Com Craze
No Dot-Com Craze
The consolidation wave sweeping through the channel now is different from the surge of cash that flowed into the channel back in the dot-com heyday, executives said. The investors are smarter and the solution providers are stronger. The dot-com mistakes were lessons learned.
Solution providers have become more attractive because the companies that made it through the bubble are viewed as particularly strong and demand for IT solutions is strong, said Mike Carter, managing director at The Musser Group, the Wayne, Pa.-based firm that bought into InfoLogix.
In particular, equity firms now are attracted to solution providers like InfoLogix because they don't rely too heavily on hardware sales, they own intellectual property, and they serve a vertical market but offer a variety of solutions, Carter said. A large customer base doesn't hurt either.
Part of what attracted The Musser Group—which is led by Pete Musser, a legendary investor on the East Coast who made his fortune investing early in companies such as Comcast, NutriSystem and QVC—was InfoLogix's 1,900-strong customer base, of which 1,100 are in health care, Carter said. Also, the solution provider has 17 patents and various software applications.
"If they were just a hardware reseller, we wouldn't be interested," said Carter. "They have total solution delivery in a unique vertical."
The equity firm likes InfoLogix because of its ability to lay a foundation with a customer for future opportunities, Carter said.
"They have a great handle on the customer experience around RFID in a hospital," he said. "For example, they started one customer with a project around patient drug delivery. They used the hardware as a Trojan horse to get into the hospital with mobile infrastructure computing. They layered in software and services to track wheelchairs, defibrillators, heart pumps, as well as handling patient medicine administration," he said.
The Musser Group now owns about 20 percent of InfoLogix, Carter said, and it plays a significant role in the solution provider's strategy. The firm isn't looking for other solution providers right now, Carter said. Instead, it wants to further embed itself into InfoLogix. Its vertical focus, technology specialization and customer base create a perfect storm to compete against much larger companies like General Electric and Siemens in the health-care market, Carter said.
"We only do three or four transactions a year. We're a mini-Carlyle Group in that we dig in deep. With Pete [Musser's] experience, we can effect some serious change," Carter said. "If you have the right customer base, revenue from hardware has to be less than 50 percent, a unique vertical, unique perspective on a horizontal technology—in this case, health care and RFID—we can implement a really interesting growth strategy," Carter said.
The equity firm has already been instrumental in helping InfoLogix grow, said Gulian, adding the solution provider couldn't be where it is today without Musser's help. "[Musser] helped identify the market we're in and is helping me build an ecosystem of opportunities tied to our business [and helped take us] public, which allows us to have visibility in the marketplace and to acquire companies," he said. "I'm able to run my business, while they manage the process from private to public."
To private equity firm Thoma Cressey Bravo, this new wave of channel consolidation is just gathering steam.
Last November, the Chicago-based firm acquired a stake in Sirius Computer Solutions, a San Antonio VAR with 27 offices across the country. The investor first took interest in the IT channel about a year ago, said Managing Partner Orlando Bravo, after noticing that many software companies in its investment portfolio depended heavily on solution providers.
"I think people are beginning to discover that these are very good businesses," he said.