Can CDW Pull It Off?

At first blush, it certainly seems like a smart move. With the $175 million cash buy of one of the premier IBM, Cisco and Microsoft enterprise solution providers in the country, CDW immediately acquires expertise in server consolidation, virtualization, VoIP and unified communications. What's more, CDW gains a robust managed services and hosting business out of two Midwest data centers and more than 300 billable engineers working at customer locations.

CDW Chairman and CEO John Edwardson said he intends to use the services muscle and expertise Berbee has developed in enterprise accounts and drive those solutions down into CDW's base of SMB accounts.

"We do want to move into new geographic areas," Edwardson said, noting that the plan is to double Berbee's revenue through organic growth in five years. "If you go into any city in the U.S., and you can pick any of the larger ones, we are doing business with thousands of customers in the city that we can introduce Berbee to. We will grow both organically and by acquisition in the Berbee operation."

Added Berbee CEO Paul Shain: "What we see today is that technologies that start in the enterprise space are quickly getting sized and priced and packaged by the manufacturers to work in the SMB space. So the strength of CDW's relationships in the SMB space with some of the evolving solutions coming out of the manufacturers combined with our capabilities on the implementation side are very attractive to us."

While CDW vowed to spread Berbee's regional enterprise-oriented solutions and services model to its thousands of SMB accounts across the country, competing solution providers expressed both trepidation and doubt.

On one hand, solution providers, notably Cisco partners, fear the merger may threaten their margins. Others noted the difficulties the companies will likely encounter in trying to blend the volume-oriented culture of CDW with Berbee's value model.

Challenges aside, earlier this year Edwardson sent a letter to shareholders saying he expects CDW to be a $10 billion company by 2008. Given that CDW reported $6.3 billion in sales in 2005 and analysts expect sales of $6.7 billion this year, most observers believed reaching that goal would have to include acquisitions.

NEXT: Vendor and VAR reaction to the deal.

INITIAL REACTIONS
Robert Deshaies, vice president of Redmond, Wash.-based Microsoft's U.S. Partner Group, said he was optimistic about the prospects of the combined company. He said the deal is indicative of how the channel ecosystem is beginning to change to focus more on solutions rather than point products.

"CDW is known for getting goods to customers efficiently where they can then be deployed as solutions," he noted. "And, of course, they offer a huge, broad selection of technology, hardware, peripherals and software. Berbee, because it's a solutions integrator, focuses on a deeper relationship, customer intimacy. [Berbee is] more solutions-oriented; they'll lend their experience to CDW and vice versa," he said.

Solution providers voiced more questions about the direction the combined company would take and the challenges it would face.

Phil Sauvageau, COO of MSI Integrators, a solution provider in Omaha, Neb., that, like Berbee, has strong IBM, Microsoft and Cisco practices, said the merger could actually strengthen his company's hand against Berbee.

"The real question is, which business model are they going to adhere to?" he said. "Are they going to adhere to the CDW or Berbee model? Being that CDW is a distribution sort of a model, it's probably more likely to help us than hurt us. I think they are going to try to attack the existing marketplace with the appearance of a value-add through a distribution sort of a model, and that will be very difficult for them to do."

Wes Herschberger, CEO of MapleTronics, a Goshen, Ind.-based solution provider, said even with Berbee operating as a separate unit within CDW, the challenges are significant given the CDW reselling low-priced business vs. the Berbee solution sales approach. "It's a big, big step," he said. "They are going to have a hard time merging the cultures."

Mark Bakken, CEO of Bedrock Managed Services and Consulting, a Neenah, Wis., managed services specialist, called Berbee "a great company," but said he'd already had some first-hand experience with the tensions likely to surface after the honeymoon is over. Said Bakken: "I've already had three [Berbee] people call me up for a cup of coffee."

FEELING THE HEAT
The solution providers directly in the line of fire from a combined CDW-Berbee are Cisco partners that have invested heavily in Cisco VoIP, security and other solution specializations. Berbee's biggest practice is on the Cisco networking side and VoIP, and it has a huge Cisco solution footprint, primarily in the Midwest.

VARs say they already see significant margin pressure on Cisco routers and switches where CDW plays heavily with its reseller business. They fear that pressure will now migrate up into higher-end Cisco equipment.

One VAR, who did not want to be identified, said his best distribution price for a Cisco 2811 router is $1,722.79, only $64.20 below the $1,786.99 end-user price on CDW's Web site.

"I can't make money selling Cisco routers at this price," said the partner. "I won't do it. Cisco needs to be careful if they are going to allow CDW to sell full solutions. If it's unprofitable business, we'll walk away from it. I won't sell something I won't make money at."

Greg Starr, COO of IT Works, a Houston-based Cisco partner that has built a strong Cisco VoIP business, said he expects CDW to "commoditize" Cisco equipment being sold around VoIP, security or wireless specializations. In fact, he expects margins for Cisco products around those specializations to go from double digits to single digits.

NEXT: VARs and vendors assess potential margin impact from deal.

IT Works' top executives are looking at what steps to take in the wake of the deal, said Starr. "We are trying to realign and see what kind of threat it truly is and see if it is something to truly be scared of and worried about," said Starr. "We know it will be. The question is, what level will the impact be?"

Starr's message to Cisco: Don't let CDW commoditize Cisco VoIP products. "Cisco hypes all the specializations and makes us spend a lot of money to keep up with them," he said. "If they allow CDW to commoditize the product side of this, they are going to take a lot of value out of the specialization."

Other Cisco partners also fear that CDW will use the perennial low-priced product model prevalent in its reseller business to drive down margins for what has been a strong and healthy Cisco solution business.

"I am already concerned about Cisco profitability," said one Cisco Gold partner, who did not want to be identified. "Too much of it is already dependent on back-end rebates. We're already being squeezed on [Cisco solution] margins at the enterprise level. It's unhealthy. We already have a problem. This is just going to make it worse. The difference between CDW and us is, we make money when we sell the product. CDW makes money when they buy the product."

Chuck Robbins, vice president of U.S. and Canada channels at San Jose, Calif.-based Cisco, said last week that he does not expect the CDW-Berbee combination to result in margin pressure on other Cisco partners selling complex solutions.

"We create our profitability programs based upon what we see in the marketplace," said Robbins, noting that CDW has not and will not receive any special pricing advantages under the Cisco value-based channel model. "I personally believe that CDW and Berbee are both just as interested in profitability as any other partner. I guess we'll have to wait and see how it plays out, but I don't see anything right now that makes me very concerned."

Robbins stressed that Cisco has gone to great lengths over the past six years to build a value program that creates a level playing field for all Cisco partners based on customer value and satisfaction rather than sales volume targets.

"There isn't a volume-based pricing element in the [Cisco] program," said Robbins. "To make a statement that any partner has a pricing advantage over another one would be invalid. The pricing in the market is based upon value, as we have always talked about. So, ultimately, it comes down to the capability to deliver solutions, [and] Berbee has clearly proven to be one of our best partners in that space."

While CDW apparently gains authorizations on the entire IBM server and storage lines including iSeries and zSeries mainframes, the impact on other IBM Business Partners may be muted by IBM's restrictive account registration and value-add requirements that limit incursions into existing IBM accounts.

When asked if CDW automatically gains all IBM authorizations from Berbee, Donn Atkins, general manager of Global Business Partners at IBM, Armonk, N.Y., said, "We evaluate each of these deals independently, and I can't comment because the discussions are ongoing."

Rick Kearney, president and CEO of Mainline Global Systems, Tallahassee, Fla., one of IBM's largest solution providers, said he doubted the deal would impact margins for other IBM Business Partners because of the preventative measures IBM has in place to prevent account poaching.

"Just because [Berbee] is better capitalized than they were before, that doesn't mean they are more competitive than they were yesterday," he said.

STEVEN BURKE and BARBARA DARROW contributed to this story.