The Buying Game: Is Now The Right Time To Sell Or Merge Your Business?

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The emergence of cloud computing and mobility has brought about a brave new world of information technology in which computing needs can be satisfied by scalable access to third-party infrastructure, and tablets outstrip the sale of conventional PCs.

For channel partners, this shifting paradigm issues a stark challenge. One must successfully change with the times, or squeeze whatever is left of the old model and hopefully out-compete other partners who might be taking the same approach.

But in some cases, solution providers are choosing to pursue mergers and acquisitions as a means of either cashing out, or as a means of instantly adding new capabilities to their portfolios that might otherwise only be doable through multiple years of organic growth.

Take Heartland Technology Solutions, a solution provider based in Harlan, Iowa. Arlin Sorensen, the company's longtime CEO, sold the privately held company to WesTel Systems for an undisclosed price late last year.

"We'd been trying to transition from the legacy hardware-based solution provider model to managed services for the last seven years and we were slowly crawling our way there, but the cloud throws a huge wrench in this thing, especially since the majority of our revenue still came from selling hardware," he said. "There are also a ton of channel companies today that are owned by people who have been doing this for 20 to 30 years, and guys in their 50s and 60s are going to want to exit at some point. And when there's a big shift like this, many people can see it as a good time to do that."

Sorensen -- like other solution providers and some industry experts -- expects a lot more channel-related acquisitions ahead. But the overall outlook on channel M&A activity for the rest of this year is decidedly mixed.

Marty Wolf, president of MartinWolf, a San Ramon, California-based M&A advisory firm, expects the rate of acquisitions to accelerate over the next 12 to 18 months.

"With interest rates where they are, there is virtually no cost to borrow," Wolf told CRN. "There are only a couple of [technology] categories that are actually growing, and many people don't participate in those. I'm thinking about things like tablets, which is an area where most traditional channel guys don't compete. So there's margin pressure on the rest of the categories, which cries out for consolidation. Also, the cloud can be very disruptive in a negative way for the traditional solution providers because it changes their whole business model."

However, statistics from S&P Capital IQ, a provider of data, research and analytics, do not point to a sharp increase in channel-focused mergers and acquisitions in the near future. The company's current count of 89 acquisitions in North America for 2013 is obviously not on track to surpass the 312 channel M&As recorded by the company last year or the five-year high of 328 in 2011.

Meanwhile, the Ernst & Young Global Technology M&A Update reports that first-quarter transaction volumes within the overall tech sector (including the channel) fell 12 percent year over year, and declined 5 percent when compared with the previous quarter in 2012. But the report also notes that the average value of the deals increased by 58 percent and forecasts a gradual increase in technology M&A activity over the next several quarters. Several factors will fuel that growth, including improving macroeconomic conditions and companies' need to respond to technology trends such as cloud computing and big data analytics, according to the report.

A successful merger or acquisition requires careful consideration of several factors. CRN talked to several solution providers and industry experts to get their take on the M&A climate and what's required for a successful deal.


Wolf said his firm has closed approximately 120 deals in the past 16 years, mostly in the IT services, IT supply chain and Software-as-a-Service areas. The transaction size is less than $400 million in enterprise value, he said.

"We've done more deals in these spaces than anybody else," he said. "We announced a deal [recently] where we advised on the sale of the Software-as-a-Service player to a private equity company."

Among major companies in the channel, Wolf points to Phoenix-based distributor Avnet as an example of success on the M&A front. In the past 20 years, Avnet has acquired more than 85 companies, including Access Distribution, Ascendant Technology, Azure Technologies, Bell Microproducts, Hall-Mark, Horizon Technology Group, Magirus Group, and Savoir Technology Group.

"We incorporate value-creating acquisitions as part of our longer-term commitment to profitable growth," Avnet CEO Rick Hamada told CRN. "We conduct a strategic planning process in which we examine opportunities for growth in the marketplace, and then decide where to place our bets and where to allocate resources. We've acquired in both our components businesses and our computer business over the last seven to 15 years, sometimes to extend our geographic footprint."

Hamada explained that Avnet maintains a disciplined three-dimensional approach that focuses on the strategic fit, the target company's financials, and the culture of the company.

"As a strategic buyer, we often have very accurate estimations of duplicate resources that we can eliminate from the equation," said Hamada. "So we're very good at consolidating. In a geographic expansion situation, we most likely need to preserve the resources and assets to a high degree, so the calculus of those deals is less about duplicated resources that can be taken at the equation. In that case, it is more about the value that Avnet can add to the entity that we're acquiring, as well as the value that they can bring to us in terms of their local geographic presence relationships and local knowledge. In some cases, the driver may be the company's intellectual property, and making sure that we enable that to grow within Avnet. So it depends on the driving forces behind the economics of the deal in terms of what works best."

Hamada said M&A isn't the only avenue for solution providers to take as they look for ways to survive technology transitions.

"New services and new value propositions can lead to an expectation of more M&A activity, but I think it also leads to the expectation of new partnerships as well," he said. "Not everything has to be about acquiring. There are also new opportunities to build new ecosystems by introducing existing VARs to new value propositions and services so that they can be more robust providers for their customers."


Ben Eazzetta, president of Ares Security, Burlingame, Calif., has been actively involved as a consultant in more than 20 channel-related deals over the past 10 years, and expects channel M&A activity will increase in the coming months due to the rapid changes in technology and shifting business models.

Channel partners exploring the path of mergers and acquisitions need to tread carefully to ensure they are pairing up in a compatible manner, he said. Eazzetta advises that the discussion is often best begun with someone who is not necessarily looking to do a deal.

"It's always better to find somebody that's not for sale," he said. "This gives you the opportunity to build a relationship with them. I think sometimes people tend to look at what's available and then make a decision that might not be the best fit. It's better to say, 'Here's what I need to meet my strategy,' and then go find someone who might not be for sale, but if you can build a good relationship with them and show strategic value, they may be open to suggestions in the near future."

Eazzetta added that selling a company is often best done with a long-range approach in which you consider the value of your company, the markets you can open on behalf of the suitor, and then develop exit strategies accordingly.

Once the deal is done, the emphasis shifts toward the integration piece, which can be a major challenge in its own right.

"If anyone tells you they figured that out, they are exaggerating," said Jay Kirby, vice president of networking at Lumenate, a Dallas-based solution provider that last year acquired Troubadour, Kirby's previous company. "Integration of companies is probably the hardest thing I've ever been a part of. You have to go in with eyes wide open and understand the business. You really have to get into that market and into that team to understand how they work. ... Be honest about business functions where their methods are objectively better than yours, and be willing to adopt new ideas where they make sense."

A commitment to openness combined with a continued willingness for meaningful discussion can go a long way toward easing the integration and making the acquisition an overall success, agreed Michael George, CEO of Continuum. In September 2011, Zenith Infotech sold off its remote monitoring and management business to investors, which spun off that business into a new company called Zenith RMM that was renamed Continuum less than three months later.

"The acquirer needs to respect the knowledge of the executive leadership on the company that is being purchased, while at the same time the management of the acquired company needs to recognize that they don't make all the decisions anymore," he said. "If you can accomplish this, and also get the two sales forces to cooperate, then the integration of systems seems like the easy part. The integration of people is the real point of intersection."


For Heartland, last year was the first time the company had been on the seller's side of the table; it was accustomed to being the buyer.

Sorensen advised that when a company is looking to either acquire or be acquired, it is usually best to begin with inquiries through professional organizations and people you already know.

"Having familiarity with the company prior to doing a deal is very valuable," he said. "So we were always very active in channel organizations and associations. We connected with people and had relationships in place so that when the opportunity arose, we knew folks and could identify potential targets and bring together deals where the cultures matched."

Sorensen's point about the need for compatible cultures makes sense to Mike French, CMO of Presidio, which acquired INX, French's previous company, for approximately $85 million at the end of 2011.

"Presidio did everything they could to make sure there was good cultural alignment," he said. "It's almost a cliche, but it's really true that the culture match can make or break an acquisition. You can address process and operations to gain economies of scale, but you cannot force culture. Culture has to align and it has to happen naturally. If the cultures don't match, the combined organization will not get the people part right, and will begin to lose the individuals that they most wanted to keep."


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