Private Equity Good For The Channel

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For much of his time as head of Sirius Computer Solutions, Harvey Najim focused on two key metrics: top-line and bottom-line revenue. Like many CEOs, he was concerned with growing the size of his company as much as its profitability, since both were signs of strength in the marketplace.

That changed last November when Sirius sold a share of the business to Thoma Cressey Equity Partners, a private equity firm that invested a substantial amount of money in the business. Though the partnership resulted in no management changes, Najim says it did change the way he looks at his business' performance. Nowadays, he pays more attention to the balance sheet and EBITDA (earnings before interest, taxes and depreciation and amortization) as much as he does the traditional top and bottom lines.

Private equity is washing over the channel and the IT industry. Direct reseller CDW was taken private by Madison Dearborn. Affiliated Computer Solutions chairman Darwin Deason and Cerberus Capital Management are in talks to take the $5.3 billion reseller private. And Silver Lake and TPG Capital scooped up telephony giant Avaya in a whopping $8.2 billion deal.

In preparation for next week's VARBusiness 500 Conference and Awards, I spoke with three leading solution provider CEOs about a range of issues. Private equity and channel consolidation are high on their watch lists, and they see the wave of private investment as a reflection of the strength of the industry and confidence of investors in the ability of solution provider businesses to grow.

Jim Simpson, CEO of MSI Systems Integrators, says he sees a lot of regional solution providers wanting to slow down and not worry about growth. Tempting as it may seem to dismiss the drive for growth, Simpson says treading water is tantamount to being dead in the water -- a surefire target for acquisition or elimination.

Private equity, the CEOs say, provides funding for acquisitions and expansion, as well as management experience and leadership for business growth. Equity firms will often install their people on a company's management team and implement new strategies and performance measurements to ensure growth and return of their investments.

If there's a good market for growing companies, it's the VARBusiness 500. This year's crop of the biggest solution providers in North America had 349 reporting top-line revenue growth, and nearly two-thirds of that number reporting double-digit or better growth.

Private equity may be fuel for consolidation and expansion, but it isn't necessarily a reflection of market health. Cerberus certainly wasn't looking at Chrysler as a healthy company when it bought the ailing car company from DaimlerChrysler. In fact, financial market experts say private equity firms usually step in when companies show signs of slow or no growth. Private equity firms often specialize in turning struggling companies around either by improving management, liquidating unprofitable ventures or providing strategic direction.

For large public companies like CDW and ACS, private equity is a means to escape the expense associated with being a public company. For small companies with low growth but solid cash flow, private equity can provide the capital for operations and expansion without having to go public.

Given the limited financing, the expense of being a public company and the continual need to grow business, it's likely that this is just the beginning of the private equity wave washing through the channel.

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