Mergers And Acquisitions Heat Up In the Channel

"Two plus two sometimes equals five," says Javed Khan, president of Sunnyvale, Calif.-based Jeskell (VARBusiness 500 No. 205), which was recently acquired by FusionStorm (No. 183). In this case, the combination of FusionStorm, a commercially focused Sun shop, and Jeskell, a government-focused IBM shop, created a $400 million powerhouse.

The channel is on an M&A tear. According to the VARBusiness State of the Market research, 28 percent of large VARs (those with revenue of more than $10 million) acquired another solution provider in the past year.

Among those, the average number of acquisitions in the past year was two. The majority (54 percent) estimate that these acquisitions will grow their businesses from 1 percent to 24 percent. Twenty-two percent expect that growth to be from 25 percent to 49 percent.

The drivers behind the recent M&A spate range from the obvious--being able to provide a greater breadth and depth of products and services to a wider range of customers--to the more obscure and sometimes personal.

The sheer number of small and midsize solution providers has climbed to staggering heights in the United States, and that could be reason enough for market consolidation. With dwindling product margin and the move to a services-based model in the channel, many of the little guys just can't scale their infrastructure or their offerings to effectively compete.

Another reason: The channel is not immune to the baby-boom phenomenon as top executives approach retirement.

For FusionStorm and Jeskell, there are two sides to the acquisition story.

The Buyer: FusionStorm

"Our first goal is to look for a strategic fit, a company to complement our current value proposition and enhance the benefits we can offer to clients," says John Varel, CEO of San Francisco-based FusionStorm. "Second is the people. Do the cultures fit? The thing I find destroys a good purchase is forcing a culture on the acquired entity, or trying to combine two cultures that are just so incompatible that...things fall apart."

The final box on his checklist? The numbers, of course.

"We don't want to make a $10 million purchase if it takes 10 years to pay off. A reasonable time of three-to-five years makes economic sense," Varel explains.

The Buyee: Jeskell

Jeskell's Khan explains that, first and foremost, the acquisition was a good fit for his company, with little overlap and great growth potential.

"They do a lot of their own services, and we don't really do that, so we could potentially use their services arm to enhance our offerings," says Khan, adding that Jeskell will operate as a completely separate company, still exclusively an IBM reseller.

Khan adds that a merger or acquisition often becomes a very personal decision for an executive. "The decision becomes whether you continue to work and grow the business or you make an exit," he says. Khan says he's on board for at least two more years to keep Jeskell growing and see the deal through.