VARs Catch The Eyes Of Investors

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It's a good time to be a solution provider as private equity firms and other channel players continue to climb over each other to invest in VARs.

Just two weeks ago, Affiliated Computer Services said that investment fund Cerberus Capital Management wants to help take the solution provider private in a $5.9 billion buyout. The same week, CRN learned that solution providers Presidio and Solarcom were merging to form an $800 million mega-VAR named Presidio Networked Solutions.

A wave of consolidation has been occurring for two years or more, but the number of inquiries and the number of VARs listening have increased dramatically, executives said.

There's a multitude of reasons: Investors are flush with cash, an older generation of solution providers is looking for an exit strategy, and VARs recognize the better buying power and efficiencies that come from running a larger operation. It's a scenario VARs say they haven't seen in a long time.

When David Gulian was looking to start a solution provider business six years ago, he couldn't even get an investor to return his phone calls. So he and a couple co-founders scraped together nearly $400,000 and did it on their own. The group opened InfoLogix in Hatboro, Pa., to focus on the health-care industry.

"We couldn't raise money back in 2001. It was a bad time with the tech bubble burst. There was a void in the market that wasn't being served, but we had limited resources, limited cash," Gulian said of the company's modest beginnings.

Fast forward to 2007 and Gulian is CEO of a $60 million publicly traded company. He has a private equity partner and plans to achieve a billion-dollar market capitalization with $400 million in revenue within four years.

"We're finally being identified for the value we offer," Gulian said.

And the InfoLogix story is not the only one.

Alex Solomon, co-founder and co-president of Net@Work, a New York-based solution provider, said he gets three voice mails a week from private equity firms.

"It's incessant," he said. "They want to put their money where there's growth and stability and they see emerging resellers as an opportunity. We're getting bigger and bigger and they want to be involved."

But Solomon isn't interested in selling right now. Mainly because he's too busy making acquisitions himself. Net@Work, a Sage Software specialist, just closed a deal to acquire Spitz Software, an ACT solution provider, and is finalizing contracts to buy an Acc-Pac dealer in Connecticut. Last August, Net@Work acquired Eagle Consulting Group, another Sage VAR. He has grown the business to $14 million and is looking for more.

You don't need a nine-figure revenue base to buy another company, said Solomon. He made his first acquisition when the company's revenue was less than $10 million and he thinks the company could top $15 million this year. That makes him a big fish in his space.

"There are very few guys bigger than $20 million. That's a mega-VAR in the business applications market," he said.

That's why Net@Work continues its hunt for business application solution providers, Solomon said.

"Smaller resellers have to be larger or they'll be out of business. It's over. An [end user] no longer needs one company for accounting, one for integrated CRM, one for its e-business. Having four or five companies is crazy to manage if you're an SMB. You go to one company to handle your entire technology. It reduces your total cost of relationships and you have one person accountable. We're all seeing that happen," Solomon said.

John Varel, CEO of FusionStorm, also has been on a spending spree. He's acquired six companies over the past four years to build the San Francisco-based company into a $400 million VAR. And he's not done yet.

"We will be growing more, unless somebody bigger acquires us. Both integrators and equity firms are calling," Varel said. "You can't survive if you're small. You can't get the vendors' attention. This is the year we see the big ones [mergers and acquisitions] happen." In other words, money talks.

"Equity firms are saying they are very aggressive. And more and more of them are calling. They think they are getting a great buy. They look at our multiples and want to take a minority stake and help us grow to become a billion- dollar company," he said.

These are very heady times. While FusionStorm is still in acquisition mode, it would also consider being acquired, Varel said. "If someone wants to come in and buy us at the right value, we'd consider it, he said.

Next: No Dot-Com Craze

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