Partners: En Pointe, CompuCom Deals Predict End Of Days For Vintage VARs

The days of the vintage VAR are over, and a new era of services is bringing with it a wave of industry consolidation, solution providers said. That was especially apparent Monday, as the news of the acquisitions of two of the industry's largest solution providers emerged.

CompuCom, a $2.2 billion solution provider based in Dallas, is selling its software management business to SoftwareONE, according to CRN sources. Shortly after the report emerged, PCM announced that it had acquired the assets of En Pointe Technologies for $15 million in cash plus contingent earn-outs over the next three years.

Executives from large solution providers agreed: The acquisitions don't bode well for those betting their business on the traditional reseller model.

[Related: Sign Of The Times: SoftwareONE Acquires CompuCom's Software Licensing Business]

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"I think the traditional resale business is a problematic business model and will continue to deteriorate, and these may be signs for those to divest those assets within their portfolio," said Vince DeLuca, CEO of Logicalis US.

Aaron Zeper, vice president of sales and marketing at Signature Technology Group, agreed, saying that those who still have a majority of their business focused on reselling should be very worried by the En Pointe and CompuCom acquisitions and should take it as a sign to kick-start their services business.

"I think if your business is just to resell products that vendors, OEMs and publishers have and hope they help drive those sales, I think it should absolutely scare you," Zeper said. "People that have their business structured that way, they need to start thinking about how they will change it, and change it quickly." Zeper said his Phoenix-based company isn't worried because it has already built a strong focus on services instead of relying on manufacturer rebates.

En Pointe, in particular, is an example of a large national solution provider that has been hammered by the rapid shift to the cloud computing business model, said a CEO for a large national solution provider, who did not want to be identified.

"The cloud model is playing out," said the CEO. "There is some really big revenue that is just going 'poof'!"

The CEO said there are more large national players that are in the midst of a free-fall and are going to hit the ground hard or end up being swallowed up in a merger and acquisition frenzy. The issue, he said, is those players are late to the cloud game and are unable to make the transition.

"You can't run fast enough to catch the train at this point," he said.

Both En Pointe and CompuCom had long-standing and robust Microsoft businesses, each one of only 15 or so licensing solution providers (LSPs) in the country. A little over a year ago, however, changes to Microsoft's partner program rocked LSPs, leveling the playing field with other solution providers for lucrative large enterprise licensing deals with its Cloud Solution Provider program.

Since the changes, LSPs have struggled, facing dropping revenues and threatened with the loss of their LSP status. Insight Enterprises, another LSP, cut its revenue outlook in 2014 by $11 million to $14 million, with another $5 million to $10 million hit expected this year. CRN also reported in November that CompuCom was in danger of losing its prestigious status as an LSP, based on missed revenue targets and insufficient investment in technical certifications.

Resellers who have bet big on a few vendors will find these changes difficult to navigate, Zeper said, especially if they build their business to rely on OEM partner rebates. One top executive for a large national solution provider said he expects more consolidation in the Microsoft LSP market.

"The [LSP]s are being squeezed by the cloud computing model," he said. "The [LSP]s that have not gotten into cloud or managed services are in trouble. These are fire- sale deals. It just shows [LSP]s aren't making the money they once were."

The executive said he expects at least two more LSPs to be acquired over the next year. The pressure is coming as more customers opt for buying Office 365 and Azure deals rather than buying Enterprise Licensing Agreements and Select licensing agreements.

The executive said he is closing more robust double-digit Office 365 and Azure deals without having to work enterprise licensing deals through an LSP. That is helping his company's cloud computing services business and hitting the top and bottom line of the LSPs, he said. The amount of total revenue going through LSPs for his company is down about 50 percent over the last several years, he said.

Whether it's Microsoft LSPs or not, Logicalis' DeLuca said he expects consolidation across the industry to accelerate, with particular consolidation in smaller to midsize partners that don't necessarily have the capital or scale to execute a shift from reselling to services.

"I think anything in the pure resale space, we'll continue to see that consolidation accelerate, whether it's hardware or software," DeLuca said.

In a transaction analysis by M&A Advisors, who advised En Pointe, it said the acquisition is part of a larger trend toward industry consolidation, also highlighting the recent acquisitions of DLT Solutions by private equity firm Millstein & Co. and immixGroup by Arrow.

"This transaction continues consolidation trends in the Solution Provider space as changing markets, technologies, and cloud software and services impact how IT services, products, and software will be brought to market in the continuing changing landscape," the analysis stated.

Zeper said he predicts a cycle of smaller to midsize companies reliant on vendor rebates consolidating to their core strengths, and then reinvesting in where they want to drive the business going forward. For the largest LSPs and DMRs, Zeper predicted more acquisitions of niche providers to drive value in certain technology areas.

"You'll continue to see acquisitions over the next year," Zeper said. "Especially, you'll start to see a lot of them buying services companies and augmenting lines of business because that pure commercial hardware, software business is a hard one to continue to drive and make money at."

One CEO, who did not want to be named, said he has never seen as much merger and acquisition as there is now.

"It's a very, very active market," he said. "There are companies motivated to grow and expand, and there are companies motivated to get out. En Pointe was looking for a way out."

PUBLISHED MARCH 16, 2015