CDW's Berbee Buy Gives It A Jump Start In Building A Services Business
The $175 million acquisition of neighboring Berbee Information Networks, Madison, Wis., immediately elevates Vernon Hills, Ill.-based CDW's capabilities and not only dramatically expands its potential customer base, but also increases its attractiveness as a sought-after vendor partner.
Berbee—with sales approaching $400 million in network infrastructure and unified communications, systems and storage, security, productivity applications and managed services—is a dramatically different business than CDW's current price-driven product sales model.
The question is, will CDW be able to leverage the pricing advantage it has in the product space to accelerate customer acquisition in the services business? One has to assume the answer is yes.
The combination of CDW's buying and logistics power, coupled with a services capability, certainly has the potential to make it a formidable competitor. Berbee is already a significant player with Cisco, IBM and Microsoft, as is CDW.
But services that don't have high value-add, such as basic network infrastructure, increasingly are going to look like other products that face price-shopping. While vendors can try to protect the broader channel from such a move, in the end there is not a whole lot they can do. For a product line such as Cisco—where much of the hardware profit comes from back-end rebates—many VARs feel particularly vulnerable. It doesn't make a lot of sense, however, to drive margins lower in the near-$7-billion business that is CDW only to try to make it up in what is currently only a $390 million services business in Berbee.
But there are lots of other issues to think about. Today, for instance, there is no national solution provider brand servicing the midmarket. Could CDW be thinking that is a sweet-spot opportunity to go after by growing its services business through Berbee and perhaps other acquisitions and positioning itself as the solution provider for the midmarket?
And what does this mean for competitors like PC Connection, PC Mall, Insight and others? It seems to me it may very well force other direct market resellers to also enter the services end of the business through acquisitions. Can you smell a decline in margins yet? PC Connection, like CDW, has been dancing around the issue for years and just can't seem to get off the starting block. It may be unable to compete effectively if it doesn't do something going forward.
If PC Connection and the others in this class don't enter the services space, then they may well look to consolidate the direct market reseller space instead.
One also has to assume that now that CDW has started down this path, there is a strong possibility Berbee won't be its last acquisition. The fact that Berbee is large but mostly operates in the Midwest also indicates that a little bit of success here may very well accelerate CDW's appetite.
In the end, for the highly specialized VAR that sits in the sub-$25 million space, this whole thing probably doesn't mean much over the short or long haul. But not so for VARs in the $25 million to $100 million range that have made a nice business in the infrastructure space. CDW's product sales engine, a services arm that it aims to double in size organically and the specter of other acquisitions should give them something to think about.
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