CDW's High Price Tag

Did Madison Dearborn Partners pay too high a price for CDW? That's a question the Chicago-based private equity kingpin should be asking itself in the wake of last week's sale of CompuCom Systems.

STEVEN BURKE Can be reached via e-mail at sburke@cmp.com.

CompuCom was unloaded by rival private equity player Platinum Equity for $628 million, making Platinum a tidy estimated $124 million profit in just three years. Interestingly enough, the buyer was another private equity player, New York-based Court Square Capital Partners.

The CompuCom price tag translates into roughly 42 cents for each dollar of revenue for CompuCom, which recorded 2006 sales of about $1.5 billion. The Madison Dearborn offer, meanwhile, translates into roughly $1.07 for each dollar of revenue for CDW, which recorded 2006 sales of $6.8 billion. That's one big, whopping premium for CDW compared with the CompuCom deal. So is CDW really all that different a company than CompuCom? Not given the fact that Morgan Stanley and William Blair, which advised CDW on the Madison Dearborn transaction, included the original CompuCom sale to Platinum Equity as part of their analysis.

What's interesting about the two sales posted side by side is that CompuCom is farther down the road in tackling the challenges that CDW is just now taking on: namely, moving from primarily a hardware-centric solution provider into a full-fledged one. Across the CompuCom business units in 2006, outsourcing service margins grew 19 percent year over year, application services jumped 16 percent, software grew 11 percent and professional services margins were up 3 percent. CDW, meanwhile, is in the midst of breaking out beyond its heritage as an e-tailer/catalog reseller. Nothing hammers that home more than its blockbuster $184 million acquisition of Berbee Information Networks. And remember, the Madison Dearborn-CDW deal included a 30-day "go-shop" provision that ended with no takers.

There are more than a few industry executives wondering if Madison Dearborn paid too high a price. That remains to be seen.

"At the end of the day it's a very tough, competitive industry," said one VARBusiness 500 CEO, who did not want to be identified. "Once you buy at these multiples, you must make it work and make it pay off. That looks challenging to me."

Challenging indeed.

Did Madison Dearborn pay too much for CDW?
Let me know at sburke@.com.