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The Credit Crunch: Has Financing Returned?
After the cataclysmic bankruptcy of Lehman Brothers and subsequent Wall Street collapse in late 2008, credit dried up faster than chardonnay at a Tupperware party. Solution providers were forced to hunt for alternative financing sources as business loans disappeared and frightened banks froze or eliminated credit lines. 2009 was a painful year for many in the channel because of the credit crunch; capital was scarce both for solution providers eager to grow their business and the solution providers struggling to stay afloat.
That was last year. What about now? Is the credit crunch over?
Solution providers say the economy turned a corner this year in at least one regard: Credit began to open up again late last year, and now many VARs say it's much easier to secure a loan or line of credit and banks are now courting customers. "The banks are throwing credit at us now," said Audrey Levi of Altek Computer Group in Miami. "We've had three major banks calling us and offering us credit."
Steve Alexander, president of Third Eye Technologies in Nanuet, N.Y., agreed and stated the credit crunch is over. "If you're well managed, then you can get the money now," Alexander said. Banks will certainly scrutinize prospective borrowers, but the endemic reluctance to lend money that suffocated credit lines a year ago has been cured--at least for the time being.
"There's more stress around credit right now, but we haven't seen any material changes to the way our financing partners are operating," said Pete Peterson, Tech Data's senior vice president of U.S. sales. Peterson added that Tech Data's third-party finance partners like GE Capital and Hewlett-Packard have introduced special floor planning and leasing options for SMB-focused resellers. "We know our customers need financing options," he said, "and certainly haven't made any changes to the way we do business, and neither have our partners like GE."
But with unemployment still high and fears of a double-dip recession beginning to creep in, some VARs are getting worried. "The SMB market is getting better this year," said Todd Croteau, CEO of All Covered. "But in a normal economy, we'd see more companies increasing their services with us because they'd be growing and hiring more people. But we're still nowhere near the normal services level because businesses are still fearful of what's to come."
Consolidation Churning Up The Channel
All Covered plans on making roughly a dozen acquisitions a year for the next few years. In fact, the company even has a section of its Web site dedicated to acquisitions with sales pitches about why All Covered is the right choice for VARs looking to sell their businesses. "It's a land grab right now," said All Covered CEO Todd Croteau. "There's a lot of consolidation happening and a lot of interest in acquisitions."
Other VARs agree. "I think there's going to be increased consolidation throughout the IT industry," said Henry Fleches, co-founder, president and CEO of United Data Technologies (UDT) of Doral, Fla. "There's a lot more M&A activity in the channel right now."
Like All Covered, UDT made an acquisition earlier this year to broaden its geographic coverage, purchasing a small IT services firm in Tennessee and using it as a springboard to expand its business in the Southeast. Within its home state, UDT is already one of the strongest and fastest-growing solution providers in the K-12 education market, but the company is intent on building momentum in other states such as Alabama, Georgia and, of course, Tennessee. "One of the ways we're aiming to grow is through acquisitions," said Marvin Dejean, director of marketing at UDT.
But acquisitions can be perilous territory, too. Fleches said UDT would take a very cautious approach, letting the consolidation shake out the weak companies instead of casting a wide net. "We just didn't see the ROI in going out and acquiring a bunch of smaller resellers," Fleches said. "Unfortunately, there's a layer of complexity in our market that involves things like government authorizations and specific competencies, and a lot of resellers don't have those things."
Croteau said All Covered is keeping an eye out for VARs with strong cloud computing and virtualization practices. After purchasing I.T. Pros, All Covered acquired another SMB-focused managed services firm with a growing cloud computing practice in Analysys. Steve Kolbe, founder and CEO of Baltimore-based Analysys, said he made his first investment in cloud computing in early 2009 after being in business for almost 15 years.
"It was a wildly successful move," Kolbe said of Analysys' cloud computing practice. "About 85 percent of our net-new clients had some type of cloud component. We were very much in a leadership position in our market."
That cloud move greatly enhanced Analysys' business and valuation, which helped Kolbe get the kind of deal he wanted when he finally decided to sell his business. "It was a no-brainer for us. Everything that All Covered said it was going to do, it did," Kolbe said.
Unfortunately, Croteau said too many solution providers don't have exit plans prepared and seem to have been caught off guard by last year's economic turmoil. Their financials are in disorder, and they have been slow to adopt lucrative new practices like cloud computing and virtualization.
"I haven't seen a lot of VARs that had good balance sheets and a lot of growth. We usually see companies that fit this kind of profile: a half a million dollars in debt with a million-plus in sales and around 10 to 12 staff members," Croteau said. "It will be interesting to see which VARs dig in and try to stick out the next few years waiting for things to improve and which ones decide to sell."
Still, some solution providers appear to be proactively planning for consolidation. Pete Peterson, senior vice president of U.S. sales at distributor Tech Data, said he's seen more strategic acquisition activity this year. "Guys are starting now to look at making strategic acquisitions instead of doing deals for financial reasons," Peterson said. "I've received a lot of calls in the last few months from VARs shopping for other VARs, so I'm almost playing matchmaker."
Whether the economy improves or not, M&A activity in the channel may continue to spike the same way it has at the vendor level with buying sprees from Hewlett-Packard, Dell and Oracle, to name a few. Consolidation is a natural force that eventually occurs in almost every market, but are the days of the small, regional "lifestyle" VAR numbered? Can the I.T. industry continue to support so many diverse solution providers? How much longer can the reseller channel remain this fragmented?
"VARs really have to start thinking about the future," Croteau said. "You have to ask yourself, what's the endgame for your business? What's your exit strategy?"