The Deal That Almost Wasn't: How Insight Cut the Datalink Purchase Price By $17M And Nearly Walked Away

Datalink could have sold the company for $17 million more, but its lackluster financial results scared one prospective suitor away and prompted Insight Enterprises to cut its offer price.

Tempe, Ariz.-based Insight, No. 15 on the CRN Solution Provider 500, made Eden Prairie, Minn.-based Datalink, No. 43 on the CRN SP 500, work hard for a deal. Insight cut the transaction amount by $17 million and required what Datalink considered to be unusually high levels of financial transparency, according to SEC filings.

Datalink nonetheless decided to move forward with a $258 million sale due to the uncertainties of remaining an independent public company and the lack of a better offer, despite soliciting as many as 27 potential suitors, according to a proxy statement filed late Friday with the U.S. Securities and Exchange Commission (SEC).

[RELATED: 10 Things To Know About The Insight Enterprises-Datalink Deal]

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Datalink had received an unsolicited acquisition proposal in late March from a strategic party for at least $10.30 per share, but decided not to move forward due to the low offer price and lack of committed financing. Eight months and many hours later, Datalink would end up selling the company for just $22 million more than the initially rejected offer.

Those unsolicited conversations, though, prompted Datalink to consider whether challenges in the industry and competitive landscape made it a good time to sell the 29-year-old company.

Datalink's Board of Directors sat down in late May with Raymond James, the company's financial advisor, to discuss the systems integrator landscape, focusing on the pressures traditional IT companies face from next-generation technology and the ongoing erosion of industry profit margins.

"Our board discussed whether the challenges in the industry and competitive landscape for the company made this a good time to consider a potential sale of the company," Datalink wrote in the 204-page filing. "At the conclusion of our meeting, our board directed [CEO] Mr. [Paul] Lidsky to instruct Raymond James to prepare for a sale process."

In early June, Raymond James contacted 13 strategic acquirers (including Insight) and 14 financial sponsors to gauge their interest in a potential acquisition. Four strategic parties and five financial sponsors indicated early interest, the filing stated, and Datalink's board instructed management to proceed with the five parties (including Insight) proposing the highest purchase price.

But only three of those entities submitted acquisition proposals by the end of August - Insight, another strategic party (Party B) and a financial sponsor (Party C).

Insight offered a price of $11.75 per share, but would require the continued employment of certain individuals at Datalink, among other conditions.

In response, Raymond James asked Insight to increase the acquisition price from $11.75 to $12 per share and remove the condition relating to continued employment. Insight agreed. Datalink CEO Paul Lidsky, CFO Greg Barnum and Executive Vice President of Human Resources Patty Hamm will all leave the company following the Insight acquisition.

On Sept. 2, Datalink's board directed its management to grant Insight a 30-day exclusivity period, during which time Datalink could talk only with Insight and not with Party B or Party C.

Then the deal-making began. Insight CEO Ken Lamneck and CFO Glynis Bryan said the company wouldn't go through with the acquisition unless Datalink provided several additional measures of financial transparency.

The requested measures included adjusting Datalink's historical financial statements to align with Insight's reporting requirements, consenting to include Insight's audit of Datalink's financial statements in an SEC filing, submitting certain management representation letters and disclosing Insight's adjustments to Datalink's projected revenue upon signing of the deal.

But Datalink's legal counsel said these tasks don't typically occur until after closing, and briefed the company's board on the risks and considerations related to moving those tasks to before closing. Ultimately, Datalink's board decided to let Insight's exclusivity period expire on Sept. 30 and approach Party B and Party C about a deal.

Lidsky contacted Lamneck on Sept. 29 and said his board wasn't willing to accept Insight's financial transparency requests but was willing to discuss further. Lamneck responded that the requests were a requirement to move forward, according to the filing.

The other two suitors were, in theory, interested in re-engaging, but many roadblocks remained. Party B said it had entered into another transaction over the past month that it would need to complete before fully considering the Datalink deal. Party C didn't offer to raise its purchase price above $11.25 per share. That left Insight as Datalink's best bet.

As a result, Lidsky reached out to Lamneck Oct. 4 to continue discussions about an Insight-Datalink deal. But Insight wasn't clamoring to resume negotiations.

The company's legal counsel said Insight wouldn't resume negotiations unless Datalink agreed to its financial transparency requirements and provided Insight with a new period of exclusivity, according to the SEC filing. Despite the additional hurdles, Datalink was willing to play ball.

On Oct. 13, Lidsky informed Insight's general counsel and Insight's CFO for North America that Datalink would capitulate to the financial statement adjustment Insight was looking to make. As a result, the deal was still on.

The problems, though, were far from over. On Oct. 20, Datalink made its third quarter financials statement and fourth quarter expectations available to Insight and Party B. Datalink struggled in the quarter, with revenue falling by 7 percent to $184 million and earnings dropping by 58 percent to just $546,000, or 3 cents per diluted share.

Based in part on those sluggish third quarter results, Party B withdrew its offer four days later.

At least initially, though, Insight didn't appear rattled. Insight confirmed to Lidsky and a Raymond James representative on Oct. 26 that it was still willing to purchase Datalink for $12 per share. As a result, Datalink extended its period of exclusive negotiations with Insight until the morning of Nov. 7.

Insight, however, wasn't able to fully turn its attention to Datalink's third quarter financials until the solution provider reported its financial results on the afternoon of Oct. 27.

The next day, Insight CFO Glynis Bryan contacted Lidsky and said Insight had concerns about Datalink's performance and asked for additional documentation so that it could conduct a more thorough financial review.

On Nov. 1, when Lamneck and Bryan called Lidsky and informed him that Insight was reducing its offer price to $11 per share due to Datalink's gross margin erosion in the third quarter. Datalink's GAAP operating margin had fallen to 0.3 percent from 1.3 percent the year prior, while its non-GAAP operating margin had sunk to 2.2 percent from 2.9 percent last year.

The next day, Lidsky contacted Lamneck and asked if Insight could compromise on a price of $11.25 per share, which Lamneck was willing to do. The renegotiated deal reduced the size of the overall transaction by roughly $17 million from $275 million to $258 million.

"[Based on] the board's belief that further negotiations with Insight or the other interested parties would not result in a proposal superior to the proposal offered by Insight, the trends and uncertainties affecting our business as an independent public company and the greater certainty offered by the Insight proposal, our board directed our management to proceed to finalize the documentation for the sale of the company to Insight at $11.25 per share," the SEC filing stated.

All that remained from there was getting the deal approved by Datalink's board, which came via a telephone conference on the afternoon of Sunday, Nov. 7. The deal was formally signed that evening.

Datalink's sale was announced on Monday, Nov. 7 via a joint press release.