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That ability to take advantage of rapidly changing market dynamics is what propelled Sirius Computer Solutions, the top IBM solution provider in the country and ranked No. 77 on the VARBusiness 500 list, to seek out a private equity partner. Last November, Sirius finalized a recapitalization, with private equity investor Thoma Cressey Equity partners taking a stake in the San Antonio solution provider.
Harvey Najim, president and CEO of Sirius, and his partner, Joe Mertens, executive vice president, made a decision 16 months ago that the solution provider landscape was entering a period of hyperconsolidation. "We made the decision we wanted to be a consolidator vs. a consolidate. If you're going to be a consolidator, then you have to have access to capital markets and cash," Najim says. "We decided at the time the financial markets were attractive."
Najim says he never took any cold calls from the frequent private equity players knocking on Sirius' door, deciding instead to hire a top international investment bank and adviser, Houlihan Lokey Howard & Zukin. Najim says he chose that firm because of its methodology, which was more exacting than the usual process of putting out a prospectuslike book to a large number of prospects. "We requested that no books go out," Najim says. "They proactively picked up the phone, based upon knowing us, and tried to see if there was anyone interested in having conversations with us." Ultimately, Houlihan Lokey selected about 25 firms, which were then narrowed down to about 12 after preliminary calls, then to three before Thoma Cressey was selected. What particularly impressed the Sirius team was Thoma Cressey's corporate culture, which included a fair amount of autonomy. And, of course, being attracted to the corporate culture also means liking the people that are your partners. "This is like a marriage," Mertens says.
Benefits And Warnings
Beyond the benefits of the capital necessary to fund growth or acquisitions, a private equity deal brings a wealth of intellectual capital that management can tap for improving financial discipline and managing and completing M&As.
Jim Dixon, who was named CEO of CompuCom Systems after Platinum Equity acquired the company in October 2004, says the benefits of teaming with Platinum have propelled CompuCom to new heights. "These [private equity] guys have strengths, and you've got to use their strengths and yours so one plus one equals three. Their strengths are on the financial side, including cash management, raising cash, cutting costs and M&A." Two months after the CompuCom acquisition, Platinum bought General Electric's IT Solutions Company. That M&A expertise allowed for a seamless integration of the two companies and a stronger, more profitable joint company. "Our operating profits have gone up, and our costs as a percent of revenue have gone down," Dixon says.
JDM Infrastructure's Marks says the cash windfall coming into the channel ultimately could open the door to either financial paradise or ruin. "This is the most significant period I have ever seen of intelligent investing in this business," says the 47-year-old Marks. "Keep in mind, the Internet boom and bust was unintelligent investing. The upside is, with the right deal, you get an infusion of cash to grow the company to levels you couldn't without the money. The downside is, you give up a small or significant piece of your business and you have partners. And if you do the wrong deal, you could end up losing your business."