VARs Catch The Eyes Of Investors

No Dot-Com Craze
The consolidation wave sweeping through the channel now is different from the surge of cash that flowed into the channel back in the dot-com heyday, executives said. The investors are smarter and the solution providers are stronger. The dot-com mistakes were lessons learned.

Solution providers have become more attractive because the companies that made it through the bubble are viewed as particularly strong and demand for IT solutions is strong, said Mike Carter, managing director at The Musser Group, the Wayne, Pa.-based firm that bought into InfoLogix.

In particular, equity firms now are attracted to solution providers like InfoLogix because they don't rely too heavily on hardware sales, they own intellectual property, and they serve a vertical market but offer a variety of solutions, Carter said. A large customer base doesn't hurt either.

Part of what attracted The Musser Group—which is led by Pete Musser, a legendary investor on the East Coast who made his fortune investing early in companies such as Comcast, NutriSystem and QVC—was InfoLogix's 1,900-strong customer base, of which 1,100 are in health care, Carter said. Also, the solution provider has 17 patents and various software applications.

"If they were just a hardware reseller, we wouldn't be interested," said Carter. "They have total solution delivery in a unique vertical."

The equity firm likes InfoLogix because of its ability to lay a foundation with a customer for future opportunities, Carter said.

"They have a great handle on the customer experience around RFID in a hospital," he said. "For example, they started one customer with a project around patient drug delivery. They used the hardware as a Trojan horse to get into the hospital with mobile infrastructure computing. They layered in software and services to track wheelchairs, defibrillators, heart pumps, as well as handling patient medicine administration," he said.

The Musser Group now owns about 20 percent of InfoLogix, Carter said, and it plays a significant role in the solution provider's strategy. The firm isn't looking for other solution providers right now, Carter said. Instead, it wants to further embed itself into InfoLogix. Its vertical focus, technology specialization and customer base create a perfect storm to compete against much larger companies like General Electric and Siemens in the health-care market, Carter said.

"We only do three or four transactions a year. We're a mini-Carlyle Group in that we dig in deep. With Pete [Musser's] experience, we can effect some serious change," Carter said. "If you have the right customer base, revenue from hardware has to be less than 50 percent, a unique vertical, unique perspective on a horizontal technology—in this case, health care and RFID—we can implement a really interesting growth strategy," Carter said.

The equity firm has already been instrumental in helping InfoLogix grow, said Gulian, adding the solution provider couldn't be where it is today without Musser's help. "[Musser] helped identify the market we're in and is helping me build an ecosystem of opportunities tied to our business [and helped take us] public, which allows us to have visibility in the marketplace and to acquire companies," he said. "I'm able to run my business, while they manage the process from private to public."

To private equity firm Thoma Cressey Bravo, this new wave of channel consolidation is just gathering steam.

Last November, the Chicago-based firm acquired a stake in Sirius Computer Solutions, a San Antonio VAR with 27 offices across the country. The investor first took interest in the IT channel about a year ago, said Managing Partner Orlando Bravo, after noticing that many software companies in its investment portfolio depended heavily on solution providers.

"I think people are beginning to discover that these are very good businesses," he said.