VARBusiness 500 Shifts Into M&A Mode

Merger and acquisition activity in the channel during the past 12 months has continued at an impressive clip. A few examples include CDW's purchase of Berbee, EDS' procurement of a majority stake in MphasiS and Logicalis' acquisition of Computech.

But make no mistake: The recent spate of sales and purchases doesn't indicate a blitheness on VARs' part. In fact, successfully merging and acquiring companies requires a multifaceted approach by the prospective buyer. Certainly, there's financial due diligence, and there are additional concerns that acquiring companies should be aware of to ensure a satisfactory experience for both parties. Among those concerns are determining exactly how an acquisition will benefit the purchaser, having a clear strategy that propels the merger and resolving cultural issues between the companies.

While a small company with its financial affairs in order may look like a good purchase target, the buyer should be clear on what it hopes to gain from the acquisition. Is it a product? Market share? Expertise?

"We're constantly attempting to be honest with ourselves. We look hard and critique ourselves every day," says Terry Flood, president and COO of VARBusiness 500 No. 83 Logicalis' North America operations. "We try to see where we need critical mass. We look at key markets with good macroeconomic data. Then we ask: Are we the No. 1 partner in that market? If we're not, we want to know why."

In Logicalis' case, a good acquisition increases critical mass in a market. Flood is adamant that the prospect shouldn't "fix" an inherent flaw in the purchaser's business; rather, if such a flaw exists, it should be fixed before the deal is done.

On the flip side, Logicalis isn't interested in fixer-uppers. "We don't look for distressed companies," Flood says. "We want stable and good performers."

Some companies merge, ironically, to save costs; they combine operations and use the savings to invest in other areas of their business. But problems arise when there's not enough focus on a target's cost structure, says John Rogers, an attorney at Herrick, Feinstein, a law firm that specializes in high-tech mergers. "Break-even points are often delayed, requiring an acquirer to fund losses longer than expected."

For some investors, a fixer-upper can yield positive results. Again, the prospective buyer needs to zero in on how the target can enhance the overall company. Sometimes, a company has a solid base but has expanded ineffectively, thus draining its own resources.

"We bought a private business that needed attention and investment," says Martin Ellis, executive vice president, treasurer and CFO of Agilysys (VARBusiness 500 No. 92). "Some things needed to be divested--it needed focus. But the core didn't need too much attention."

Agilysys has, in fact, sold off some of its own holdings to generate cash for future acquisitions.

"We're targeting focused businesses, with the right systems in place to manage the company," Ellis says. "Their finances should be managed properly, and their taxes handled well. They should have good relationships with suppliers and have something that differentiates them. Further, they should have a good structure in attracting and retaining employees."

And mergers don't necessarily result in layoffs, although that's sometimes inevitable.

"Some acquisitions necessarily shed jobs, but, to date, we haven't done any that require cutting layers. We're not interested in 'chain sawing'--going in, cutting and making a profit," Flood says. "We look for strong organizations, but perhaps there are some constraints that need investment to get to the next level."

A common blunder companies make is taking employees into account after the fact.

"What mistakes do acquirers make in choosing targets? Failure to consider the integration of the two cultures," Rogers says. "The smaller company tends to take the culture of the larger one." While the benefit of that, generally, is more efficient processes, the small-business collegiality goes away over time, he adds.

Logicalis' key execs "lunch and learn" regularly with newly acquired companies. "We talk for hours, shake hands. We immediately get to know them," Flood says. "We fly in right out of the gate."