Feeding Frenzy: VARs Hungry For Solutions
Joseph F. Kovar
And they are willing to pay you a premium.
Today's solution provider community is going through an unprecedented binge of mergers and acquisitions fueled by the desire to add the technical expertise, customers, vertical reach and, ultimately, the scale to drive 21st century sales growth. Solution provider executives selling their businesses say they welcome the broad and deep solution skills their buyers bring to the table and, in most cases, are remaining with the new company. The buyers say they need the scale and hard-to-get talent to continue to grow their businesses.
Unlike the chaotic, cash-squeezed solution provider sellouts of a few years ago in the wake of the dot-com crash, today's deals are all about increasing solutions muscle and reach in an age in which customers are looking to the channel to do it all—from high-level consulting to solutions development to procurement to services. Even vendors and ISVs are snatching up solution providers to fuel their own services sales growth. Call it the channel on steroids. There have been dozens of deals completed this year, and industry executives see no end in sight as VARs bulk up. In the past couple weeks alone, one of Sage Software's top solution providers, New York-based Net@Work, acquired another strong Sage VAR, Eagle Consulting Group, while Norcross, Ga.-based IBM VAR Optimus Solutions acquired another major IBM VAR, Paaridian Technologies.
For its part, Net@Work is looking at acquiring two more companies over the next several months in order to build up its solutions reach, said Alex Solomon, co-founder and co-president of Net@Work, which expects to grow its sales to $14 million this year, up from $11 million last year. Solomon said the merger frenzy is the result of customers demanding end-to-end solutions from applications to infrastructure from solution providers. He said clients are sick of finger-pointing between hardware and software companies and multiple partners. "Customers don't want to go to two or three different companies," he said. "They want to go to one company that has total accountability for the whole solution. That is our value proposition. It makes sense. The total cost of ownership is reduced when one company is accountable," Solomon said.
Eagle President Debra Ellis, who will serve as manager of consulting services at Net@Work, said the industry is a lot different today than when she founded Eagle 12 years ago. "There [are] a lot more skill sets you need on board in order to provide the best service," she said. "The technology is more advanced. You can do so much more with the technology, but you need to know how to do it." The deal brings Eagle's customers access to an infrastructure practice, a CRM business, a document management practice and even a networked copier group, she said.
Michael Healey, former president of $10 million VAR TenCorp., which was scooped up by solution provider GreenPages earlier this year, said the M&A mania is all about VARs getting the scale to reach new solution heights. Combined, GreenPages-TenCorp. expects to grow sales 30 percent this year to $100 million. Even more impressive, GreenPages' solutions sales now account for 40 percent of sales, up from only 12 percent a year ago, he said.
"The bulk of the market isn't buying the way they used to," said Healey, now CTO at GreenPages. "Now, businesses are looking to solution providers to just do it all. And to do it all, you need scale and scope."
At the same time, the skills required to do customer support, networking and integration keep going up exponentially, he said. "The level of specialization is pushing you to be bigger." At the end of the day, it's all about being the "one throat to choke" for the customer, he added. "But there is a benefit to being the one throat because you are that customer's advisor."
Healey said the challenge for companies looking at making a deal is choosing the right partner. "To find the right partner that can take what you built, integrate it and keep the customers is a tough challenge."
One ex-solution provider who went through a couple of acquisitions after the dot-com collapse said the primary difference at that time was that a lot of firms were undercapitalized and forced to sell. "Today, companies are selling with a bit of a premium, so things are different," he said.
Part of that premium comes from the fact that much of the new crop of solution providers being acquired are stable, viable businesses that are finding it difficult to grow. That's because there's a major capital investment necessary to provide ever-complex solutions for customers looking for a single outsourced IT provider.
BULKING UP FOR SCALE
Hope Hayes, president of Alliance Technology Group, a solution provider in Hanover, Md., is one of the VARs now on the hunt. She said she currently is looking to grow her business by acquiring viable solution providers with storage, security and professional services expertise who have "hit the wall" in terms of growth and their ability to deal with the complexities of running their businesses. "Most people who start companies are not from the operations side. They're people like myself who know the business. I didn't have a clue when I started. I just thought I could go out and sell something," Hayes said.
Scale is also an especially important consideration for solution providers looking at merging with peers that work with the same vendor partners.
It was important to John Reed, COO at San Antonio-based Sigma Solutions, which in March acquired his previous company SIS Technologies. Reed said he and Sigma President Scott Gruendler mutually came to the conclusion that one Sun-centric company is better than two. "It's easier to be a $90 [million] to $100 million VAR than a $40 million VAR," he said.
James Ivy, president and CEO of Stonebridge, a VAR in Dallas, cited scale when his company sold its Sun-centric business to cross-town rival Lumenate late last month and decided to refocus on its fast-growing consulting business. "The customers we served that were predominantly Sun-centric have the opportunity to be better served with Lumenate," Ivy said. "We will continue to do business with the others as we have in the past with our consulting business."
Mont Phelps, president of NWN, a Waltham, Mass.-based Cisco solution provider that a few weeks ago saw a deal to acquire fellow Cisco partner NetTeks Technology Consultants scuttled, said his company is continuing its search to acquire Cisco-focused partners. "Scale matters," he said. "If you look at the Cisco world, they're driving part of this through their certification process. The bar is being raised, which is entirely appropriate, but if you want to be Gold- and Master-level [partners], it takes a high level of commitment."
For its part, NetTeks also had hoped to gain size from the merger, which would have created a $50 million solution provider. NetTeks, a $10 million Cisco Premier partner, would have benefited from NWN's Cisco Gold status, as well as its managed services expertise, said Ethan Simmons, partner at NetTeks. The Boston-based company now plans to go it alone and work toward Cisco Silver status on its own, possibly seeking outside funding or making an acquisition of its own somewhere down the line, he said.
While some partners whose plans fell through said they will still pursue the M&A path, others are taking a different route to become a one-stop shop. Integration Partners, a Lexington, Mass.-based solution provider with a legacy Nortel data business, sought to acquire a VoIP solution provider to jump-start its IP telephony practice, said Bart Graf, co-founder and director of the company. After the deal fell through, Integration Partners eschewed the acquisition strategy and instead cherry-picked new hires to expand its voice skills.
In addition to investing heavily in a Nortel VoIP expansion in January, Integration Partners also has added security and wireless to its mix in the past several years. The moves come as customers look to the solution provider to do more for them, Graf said. Integration Partners, which has had a compound annual growth rate of 30 percent over the past seven years, expects to double its sales over the next several years, he said.
JUMPING INTO MANAGED SERVICES
One of the hottest market segments for channel acquisitions is managed services, which is creating huge opportunities to cash out as vendors and solution providers push to acquire managed service providers while MSPs look to acquire solution providers, especially those with small-business expertise.
Last month, storage vendor Iomega acquired managed security service provider CSCI, with an eye toward taking managed services to its worldwide network of small-business solution providers and lessen its dependence on hardware margins. Rich Tear, co-founder of CSCI and now vice president of managed services for Iomega's OfficeScreen division, said while Iomega understands how to market solutions, "they really want to jump into services with both feet. But as a small San Diego company, [it was hard for us] to get CLEC business in New England."
The southeastern United States has dozens of solution providers whose owners are nearing retirement, along with small telecommunications agents lacking the ability to converge their services with IP-based networking, said Perry Swaim, president of Voyss Solutions, a Charlotte, N.C.-based MSP looking to acquire several such firms. Size equals strength in the managed services market, Swaim said. His goal is to grow Voyss large enough to attempt an IPO in the next few years, but if that doesn't happen, the vast multistate managed services operation Voyss is on course to becoming will be a secure, highly profitable business, he said.
Instead of tackling the expensive proposition of buying several smaller solution providers outright, Voyss uses what Swaim called an "asset rollup process" to gradually buy out the owner in a way similar to a reverse home mortgage. "We don't give [a VAR's owner] the opportunity to opt out right away," he said. "What we do is give them lineage: We keep the company going and payrolls paid as we build an umbrella company we hope to at some point fund or take public, and at that time, they would cash out," he said.
Lan-Com Technologies, a systems integrator in Hickory, N.C., recently completed this process with Voyss, said Ramsey Dellinger, president of Lan-Com. The gradual buyout gave Dellinger the freedom to concentrate on a new venture that orchestrates financing for MSPs looking to add hardware as a service—MSP On Demand, he said.
Even vendors are bulking up to increase their solutions muscle in their ever-growing services businesses. Often, that means competition for solution providers. This year, for instance, EMC acquired two Microsoft-centric VARs, Interlink and Internosis, to bring their Microsoft services experience to its other channel partners. Microsoft in April acquired ProClarity, a developer of analytical tools based on Microsoft's business intelligence platform. Xerox, Canon and Toshiba all purchased one or more of their dealers this year as well.
In such acquisitions, the partners normally benefit because the vendor may be willing to pay an inflated price for the company to get services capabilities fast, said a channel source who requested anonymity.
Going forward, solution providers expect the acquisition push to continue. In a mature industry like IT, there are always shakeouts of companies that cannot otherwise survive, said Tom Croce, president of Phoenix Computer Associates, Fairfield, Conn., which last month was acquired by investment firm Clarey Technology Group, Irvine, Calif. "Mergers and acquisitions sometimes are necessary to remain competitive," he said.
In the end, the fact that many solution providers today are more likely to be negotiating the sale of their organizations on more favorable terms than they might have a few years ago does not mean they are quick to let go. "It's a little scary," said Sigma's Reed. "It's like selling off one of your kids."
DAN NEEL, STEVEN BURKE, KRISTEN KENEDY, PAULA ROONEY, JENNIFER HAGENDORF FOLLETT and STACY COWLEY contributed to this story.