Page 1 of 2
CDW's $175 million acquisition of Berbee is just one example of the frenzied consolidation that swept through the channel last year. In fact, CDW, itself, earlier this month said it had agreed to be acquired by private equity firm Madison Dearborn Partners for $7.3 billion in cash. M&As continued to increase in 2006, with a new merger occurring, on the average, more than once a week. And that's just the larger deals that caught the public eye; scores of smaller VARs quietly joined forces in hopes of bolstering their businesses.
View month-by-month M&A activity among the VARBusiness 500.
The CDW-Berbee deal, however, stands out as one of the most memorable mergers of 2006, as it illustrates a significant shift in the landscape of the channel, with a direct marketer encroaching on the territory of traditional value-added resellers. The deal left many VARs wondering about their futures.
In fact, the desire to control its own destiny was one of the main catalysts that spurred Berbee to go shopping for a buyer in the first place, Shain says.
"We saw that the channel was an evolving marketplace, and we looked into the future and thought about what business model was going to thrive. We felt that we had a piece but not the entire solution set for customers," Shain says. "We were experiencing very rapid growth on the project end of the equation, but increasingly we saw our customers placing value on the efficiencies of the supply chains of organizations like CDW."
It's that change in buying behavior--companies looking to buy hardware, software and services from a single IT solution provider that can speak to business strategies as easily as technologies--that's a major force behind channel consolidation.
"Historically, the key to success for a VAR was excellence in a technical skill, but in the future the key will be excellence in business management," says Ryan Morris, analyst at the Institute for Partner Education & Development. (IPED is part of the CMP Channel Group, which publishes VARBusiness.) "That change is driven by the buying behavior of end users and the increasingly competitive climate among solution providers. In order to thrive, a solution provider must be excellent at managing a business, building an organization, driving a P&L model, recruiting and motivating talented people, implementing effective demand-generation campaigns and improving sales effectiveness--all in addition to the 'ante up' stakes of technical skills."
While Berbee gained the stability of a large, established parent company in CDW, the direct marketer, in turn, made deeper inroads in the lucrative IT services market--in particular, the highly coveted managed service space.
In fact, strong services capabilities was a consistent attribute among VARs acquired in 2006 and will continue to be an enticing characteristic of acquisition targets in the coming year.
|CDW SVP Paul Shain: "[Berbee] saw customers placing value on the efficiencies of the supply chains of organizations like CDW."|
"Two [things] make a solution provider an attractive acquisition target: first, having an established service practice with effective processes--either project services or managed services," Morris says. "Second is having an effective sales operation that has demand-generation capabilities."
That demand for services expertise drew companies of all sizes and shapes into the VAR shopping spree last year. (Because so many of the companies involved in M&As were privately held, ascertaining the value of those deals was untenable.)
Telcos, for example, were among the companies shopping for VARs last year as a way to expand into managed services. In September, AT&T (No. 61) shelled out $300 million for ASP USinternetworking, which specialized in providing management and outsourcing services for business software from Oracle, Microsoft, IBM and Ariba.
Companies with existing managed service contracts that provide long-term annuity revenue will continue to be a hot commodity this year, Morris says. "These companies are less abundant and, therefore, somewhat harder to find," he says. "But when a strong managed service provider emerges, it's highly sought after by larger solution providers."
NEXT: Additional qualities on buyers' wish lists.
1 | 2 | Next >>