Who Will Be Acquired In 2005?

Look for Merger and acquisition activity to be robust in 2005, with smaller solution providers, especially those with appealing verticals or geographies, getting gobbled up. But even some of the largest companies on the VARBusiness 500 could become fair game in this acquisitive climate.

"There are a couple of weak companies in the market that might make good targets for companies looking for consulting skills, like BearingPoint and Capgemini," predicts Bill Scheer, an analyst with consulting industry experts Kennedy Information. "Some people say EDS might be for sale, but I say they are too large. But if they continue to have problems, it's more likely they will [sell] portions of the company off, like A.T. Kearney."

Keith Bradley, Ingram Micro's North American president, expects some of the direct marketers to join forces. They will be motivated, he says, by the need to create further economies of scale and to remain competitive. As for the distributors, Bradley says Ingram might acquire companies involved in point-of-sale operations (as it did last year with privately held Nimax), consumer electronics, enterprise storage and enterprise servers.

One industry source, who requested anonymity, speculates that PC Connection might make a good acquisition candidate because of its presence in multiple markets. The same source points out that, on the distribution side, D&H, with a solid presence in the white-box space, could be sold, and that Bell Micro, because of its storage niche, might be acquired.

Bryan Alexander, a Raymond James analyst, says a slower growth rate in the near term of 5 percent to 7 percent will lead to more competitive pricing, which could make it tougher for smaller VARs to stay afloat.

"My prediction is that by 2007, 30 percent of today's solution providers in North America will no longer exist [exclusive of new entries]," adds Michael Haines, Gartner principal analyst. "That means as many as 10,000 to 12,000 of the 40,000 to 50,000 VARs will go out of business...mostly because they don't know how to run a services business."

Of those VARs he predicts are at risk, Haines estimates roughly 5 percent--or 500 to 600--will be acquired. That's a lot of deals set to come down the pike in the next couple of years. Haines says that those most likely to get "plucked off" will be solution providers that offer key geographies and verticals.

Incenting the buying whirl, in many cases, will be an overflowing set of cash boxes. Solution providers and integrators that weathered the recent downturn did so by acting prudently and now have significant cash on hand or borrowing capacity that they can put in play to grow, Ingram Micro's Bradley says.

In fact, Raymond James' Alexander says that one likely acquisitor would be CDW, specifically because it has a lot of cash. "Over $7 per share on their balance sheet," he explains. He adds that Ingram Micro and Tech Data could buy niche distributors that offer higher-margin specialties, like data capture or security.

Considering other parts of the industry, Kennedy's Scheer says Affiliated Computer Services (ACS), a Dallas-based IT outsourcer, is actively hunting European properties. "I wouldn't be surprised if, in the next month, CA or EMC ends up buying a consulting company," he says.

Like Bradley, Janet Waxman, vice president at IDC, says the industry's maturation could easily compel the owners of smaller solution providers to strike a deal to be acquired. "OEMs might consider buying some of the smaller VARs to get some of their expertise," she says.