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As the IT industry moves inexorably toward the cloud computing and recurring services revenue models, solution providers of all sizes need to take a hard look at the future of their businesses, lay out a strategic plan and then decide to buy, sell or hold, meaning change via a merger, acquisition or other financing process or stand pat.
Those discussions yield some truly "existential" questions, said Simon Auerbach, managing director of the boutique investment firm and M&A advisory Foros Group, but they have to be addressed in a conscious, thorough way, even if the answers are to do nothing in the short-term.
"You need to look at 'Can I survive on a standalone basis,'" Auerbach told attendees at UBM Channel's Best of Breed (BoB) conference in Tampa Wednesday. "Don't underestimate that there will be more consolidation as this industry matures."
[Related: Solution Provider 500 M&A: Networking Channel Acquisitions Worth Watching]
Foros, founded in 2009 and headquartered in New York, has completed about $43 billion in deal value over the past three years across some 26 total deals, ranging in size from $15 million to $29 billion. It's been a part of several well-known tech industry and channel M&A moves, including Presidio's acquisition of BlueWater Communications back in February.
Auerbach walked BoB conference participants through how Foros looks at a potential M&A deal, everything from evaluation to execution, and he told solution providers to address six key themes as they make their choices. Customer needs are much more sophisticated, for starters, and channel partners are gaining more power with their customers as customers become more agnostic about which vendors, particularly hardware vendors, they choose.
The channel move toward a solutions-and-service selling model is upping the premium placed on recurring services revenue, Auerbach added, while cloud computing, as a macro-trend, is challenging previous models of on-premise IT delivery. And, don't forget just how fragmented much of the IT channel is, he said, considering how many regional businesses there are and how many of those are founder-owned and owner-controlled.
Partners looking at M&A first need to come up with a reason, he said. Is it to increase scale? Diversify revenue? Realign strategy? Monetize an investment? Preserve capital? Advisors such as Foros then look at companies in terms of realistic expectations, particularly around valuation, an area where many companies are often wishfully thinking, Auerbach said.
Overall, however, there has to be a plan.
"It's always easy to ignore these existential questions, or to avoid or defer answering them and say, let's do that next year," Auerbach said. "Make that decision today. Even if it's nothing. Make that decision consciously."
