BoB Conference: Solution Providers Face Big Existential Questions About M&A2:54 PM EST Wed. Oct. 17, 2012
As the IT industry moves inexorably toward the cloud computing and recurring services revenue models, solution providers of all sizes need to take a hard look at the future of their businesses, lay out a strategic plan and then decide to buy, sell or hold, meaning change via a merger, acquisition or other financing process or stand pat.
Those discussions yield some truly "existential" questions, said Simon Auerbach, managing director of the boutique investment firm and M&A advisory Foros Group, but they have to be addressed in a conscious, thorough way, even if the answers are to do nothing in the short-term.
"You need to look at 'Can I survive on a standalone basis,'" Auerbach told attendees at UBM Channel's Best of Breed (BoB) conference in Tampa Wednesday. "Don't underestimate that there will be more consolidation as this industry matures."
Foros, founded in 2009 and headquartered in New York, has completed about $43 billion in deal value over the past three years across some 26 total deals, ranging in size from $15 million to $29 billion. It's been a part of several well-known tech industry and channel M&A moves, including Presidio's acquisition of BlueWater Communications back in February.
Auerbach walked BoB conference participants through how Foros looks at a potential M&A deal, everything from evaluation to execution, and he told solution providers to address six key themes as they make their choices. Customer needs are much more sophisticated, for starters, and channel partners are gaining more power with their customers as customers become more agnostic about which vendors, particularly hardware vendors, they choose.
The channel move toward a solutions-and-service selling model is upping the premium placed on recurring services revenue, Auerbach added, while cloud computing, as a macro-trend, is challenging previous models of on-premise IT delivery. And, don't forget just how fragmented much of the IT channel is, he said, considering how many regional businesses there are and how many of those are founder-owned and owner-controlled.
Partners looking at M&A first need to come up with a reason, he said. Is it to increase scale? Diversify revenue? Realign strategy? Monetize an investment? Preserve capital? Advisors such as Foros then look at companies in terms of realistic expectations, particularly around valuation, an area where many companies are often wishfully thinking, Auerbach said.
Overall, however, there has to be a plan.
"It's always easy to ignore these existential questions, or to avoid or defer answering them and say, let's do that next year," Auerbach said. "Make that decision today. Even if it's nothing. Make that decision consciously."
NEXT: Avoiding M&A Pitfalls
A third-party advisor such as Foros is crucial for providing objective, strategic guidance, and can also offer perspective on the types of deals available, from spot acquisition to synergies with third parties to create instances where, as Foros' Auerbach put it, "one plus one can equal three."
Where many companies get tripped up in the M&A process is in cultural alignment. It's also important to avoid the types of deals that may look good in theory but stumble in practice, he said.
"Joint ventures look good on paper, but time and time again, they are very hard to execute and very hard to unwind," Auerbach said. "Many times they are there to avoid the key question of why not just get married?"
Other things to pay attention to, according to Auerbach, are how a potential deal can disrupt the organization, from employees to customers. Solution providers should also be wary of trying to find every potential deal partner there is -- an approach that may miss the "wild card buyer," but is much more targeted and less likely to create competitive advantages among other industry players that know you're for sale, Auerbach urged.
The criteria solution providers should look at when choosing an advisor include a strong reputation, superior M&A experience, unbiased advice, extensive experience with complex transactions, tech industry experience, experience with founder-owned and founder-controlled companies, and commitment to the mandate. The type of advisor, Auerbach said, is also important. Industry brokers, for example, can match buyers and sellers but don't much get involved in the deeper things like cultural alignment. And, tech M&A experts know the industry, but they're also apt to talk to everybody to gather information and may reveal your secrets to competitors, Auerbach said.
"Make sure they have your interests in mind versus somebody just trying to get a deal done," he said.
PUBLISHED OCT. 17, 2012