CDW Buyout Bid Puts Channel In Private Equity's Sights

That's what solution providers took away from Madison Dearborn Partners' recent $7.3 billion cash offer for CDW. Solution providers point out that the Chicago-based private equity firm's eye-popping offering price translates to paying roughly one dollar for each dollar of revenue for CDW, which recorded 2006 sales of about $6.8 billion.

"This validates my business model," said one large hardware-focused solution provider who asked not to be identified. "There are services companies that do hardware and there are hardware companies that do services. The latter are smiling because CDW got bought at such a big number."

Solution providers and analysts note that that could put companies such as PC Connection and Insight Enterprises squarely in the sights of private equity firms.

Madison Dearborn did not respond to repeated requests for comment, but with its bid for CDW it becomes an instant force in the channel.

According to Madison Dearborn, it has more than $14 billion of equity capital under management and makes new investments through its most recent fund, Madison Dearborn Capital Partners V, a $6.5 billion investment fund raised in 2006. Its new fund has the borrowing power to spend up to $26 billion to acquire companies, typically in increments of $100 million to $600 million of equity capital in a single acquisition, borrowing the rest, according to published reports.

While only the largest solution providers fit its investment profile, many say the CDW bid could unleash a new wave of private equity money flowing into the channel.

"We appreciate that private equity is interested in our lines of business," said Terry Flood, president of Logicalis, a $900 million global solution provider with U.S. headquarters in Bloomfield Hills, Mich. "Private equity believes there are solution providers out there that are undervalued, and we certainly agree with that."

And Jim Dixon, CEO of CompuCom, a Dallas solution provider that has been owned since 2004 by private equity firm Platinum Equity, noted, "The channel is getting back positive. Profitability is up and when it is, other people look at you," he said. "We had it in the heyday of the late '80s and early to mid-90s. It's nice to have it back. These businesses have been well-managed, and they are making profits and they are real businesses."

Logicalis has been on a buying spree of its own in recent years, targeting regional solution providers with a strong services business and a solid partnership with IBM, Hewlett-Packard or Cisco Systems. Just last week, Logicalis acquired Carotek's Information Technology Division, an HP enterprise VAR in Matthews, N.C., with annual revenue close to $25 million.

Flood said he wouldn't be surprised to see more private equity buyouts of larger solution providers.

"But I don't see them focusing on smaller regional players, which is the target we have from an acquisition and growth standpoint," he said. "And private equity is looking at a window of time to build up a business and then cash it out. We are making an investment in the industry with an eye toward building a long-term business."

Other solution providers believe that short-term time frame on the part of private equity investors could bring some sanity to channel pricing gambits. Competing VARs charged that in the months prior to the announcement of the buyout bid, Vernon Hills, Ill.-based CDW had been selling some products below their costs in order to win new accounts.

Some solution providers hope that a Madison Dearborn focus on the bottom line, rather than just sales, could help moderate CDW's pricing strategy.

"Private equity companies don't buy companies to just run up sales; they are looking for return on the dollar," said Bruce Geier, president and CEO of Technology Integration Group, a solution provider in San Diego with annual revenue of $300 million-plus. "I think some of the tactics CDW uses—such as selling at or below costs to penetrate accounts to go after larger businesses, then making money later on rebates or whatever—may go away. Now they would have to make a profit, so [aggressive pricing] may not be as blatant as we have seen in the marketplace."

CDW Chairman and CEO John Edwardson refused to comment on CDW's post-acquisition pricing strategy. When asked during a conference call announcing the deal with Madison Dearborn if CDW expects its pricing to moderate once the deal is closed, Edwardson said, "I'm disappointed in your question. It's inappropriate on this particular phone call. We'll move on to the next question."

CompuCom's Dixon said his company's private equity owners focus on profits.

"A good management team ought to be focused on the bottom line anyway. We did it when we were public," he said. "We did it when we were owned by venture capitalists. We are doing it now as private equity. I would say private equity is a little more involved in operations from a decision standpoint, but they are good, solid management decisions they are making.