Private Equity Funding Driving VAR Consolidation

MTI Technology, an Irvine-based EMC solution provider that was No. 76 on CRN's Fast Growth 100 list, used equity funding from Lindon, Utah-based Canopy Ventures and Boston-based Advent International as part of its June acquisition of Collective Technologies.

MTM Technologies, Stamford, Conn., which was No. 19 on CRN's Fast Growth 100 list, used a combination of $10 million in equity funding and a $25 million subordinated term loan late last year as part of its acquisition last November of another solution provider, NEXL.

Incentra Solutions, a Boulder, Colo.-based provider of storage and managed services to enterprise customers that was No. 10 on CRN's Fast Growth 100 list, used a combination of equity and debt funding to acquire several solution providers this year and last year to expand its geographical reach, said Chairman and CEO Thomas Sweeney.

"Our preference is to use debt from private equity funds," Sweeney said. "It lessens the risk, and is less onerous than working with banks."

Sirius already has a nationwide presence, Mertens said. "But there are some geographies where we still need a footprint," he said.

Mertens said that Sirius has grown organically about 15 percent annually for the past couple years, as well as about 10 percent to 15 percent yearly due to acquisitions, and has been profitable since it was founded.

Despite the strength of its business and its IBM relationship, Mertens said it is important to look for ways to continue to grow. "Customers are looking for firms that are larger and more capable in terms of geographic presence and skills," he said. "Capital investment is helping to drive consolidations. VARs need strong skills."

While taking private equity funding is not only about acquiring other solution providers, the possibility is nearly always present.

Being acquired by a private equity fund is a chance to quickly build out an existing business and increase one's customer base, said David Traxler, president of VSS, a Ridgeland, Miss.-based IBM solution provider that in May was acquired by Riverzone Group, a Richmond, Va.-based holding company.

"It may take longer to build out by yourself," Traxler said. "We are working really hard to grow up and out organically. Out in terms of geographical coverage, up in terms of our existing customer base. But if opportunities exist where an acquisition makes sense, maybe in terms of geography or complementary skills or complementary customer base, if the economics work, you have to ask yourself, 'Why not do it?' "

Network Hardware Resale, a profitable Santa Barbara, Calif.-based reseller of used Cisco and other network equipment that over the past 20 or so years grew annual sales to about $100 million with no debt, late last year took $50.5 million in debt and equity financing from Allied Capital, a Washington company, in order to expand its international opportunities.

In January of next year, NHR is slated to open an Asia-Pacific headquarters in Singapore, and next year plans to expand its European operations, currently based in Amsterdam, said Karen Anne Platt, CFO. The company is also expanding its business into reselling and deploying new networking equipment with its September signing of a reseller agreement with Force10 Networks, a San Jose, Calif.-based builder of high-speed Gbit and 10-Gbit Ethernet switch routers, Platt said.

"It complements what we're already doing, but also lets us offer customers something new," she said. "We would always consider the right acquisition opportunity. But there are no plans on the table, or even close to the table."

NEXT: How VARs are putting private equity funding to work.