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Distribution Hot As Private Equity Hunts For B2B Play

‘I think fresh blood and new ownership is going to be a good thing for Tech Data. There has always been something holding them back from realizing their true potential,’ says Rory Sanchez, CEO of TRUE Digital Security, a top cybersecurity specialist who has worked with Tech Data for several years.

With private equity dollars circling the tier-two distribution market, more consolidation is likely coming as investors recognize the value of the products and services that technology is bringing to the market, according to a longtime analyst.

“The two-tier distribution market is a hot market in general. The market is growing. There’s a lot of complexity that they solve for the vendors and partners,” Michael Diamond, a former 17-year Ingram Micro veteran who is now a senior director of market intelligence with The 2112 Group, told CRN. “ I think what we’re going to see is more consolidation in the two-tier market... does that mean rolling up distributors in higher growth categories? I think it could be that. Could they roll up some other IT service resellers? Could be that. There’s a lot of high growth categories in the market around cloud, security that I’d be looking at.”

Apart from private equity firm Apollo Global Management, which announced a deal with Tech Data on Wednesday, RRJ Capital has been rumored to be looking at Tech Data rival Ingram Micro.

[RELATED: 8 Big Things To Know About The $5.4B Apollo Global Management-Tech Data Deal]

Tech Data CEO Rich Hume said the deal with Apollo Global Management to acquire the company will accelerate its path forward, bringing a better long-range focus by taking it private and making it more competitive in the market.

“As it relates to engaging with the private equity owner, you can have a longer-term view of what you want to accomplish, and not get distracted by perhaps the requirements of a quarterly earnings call,” Hume told CRN. “Apollo has over $320 billion worth of assets under management. They have the ability to invest organically as well as acquisitively in Tech Data. So, this is a scenario where we have the fortune of potentially being acquired by someone who has the opportunity to really accelerate our business moving forward.”

Apollo Global Management has agreed to purchase Tech Data for $5.4 billion, or $130 a share. Hume will remain in place as chief executive. The deal represents a 24.5 percent premium above the 30-day volume weighted average closing share price ending Oct. 15, the last day before rumors surfaced of a buyout.

“This is a deal that is very, very attractive for our shareholders. It's very attractive for partners and vendors, because I truly believe it will allow us to accelerate our future,” Hume said. “It's also very attractive for my Tech Data colleagues because this is a situation where we take our company as it is, and then advance it into the future.”

Sources who spoke with CRN said the deal came together as a result of the company’s ownership interest in solution provider Presidio, which is No. 23 on the 2019 CRN Solution Provider 500.

“We led the investment in Presidio which we took public,” the source said. “When we were in Presidio, we increased the size of the business by over 50 percent, both organically and through add-on acquisitions so we’re very, very familiar with the channel. That’s one of the reasons we had an interest in Tech Data. Given our investments in Presidio we really got to understand the different parts of the channel, the different players. We’ve built a relationship with Tech Data over the last couple years. We feel really good about this.”

Rory Sanchez, CEO of TRUE Digital Security, a top cybersecurity specialist that’s working with and raising the awareness of MSPs to prevent ransomware and cyberattacks, said he sees the Apollo Global Management acquisition of Tech Data opening the door for the distributor to take it up a notch.

“I think fresh blood and new ownership is going to be a good thing for Tech Data,” said Sanchez, who has worked with the distributor for many years. “There has always been something holding them back from realizing their true potential. They have great people, but they have always been a bit conservative. I think aggressive ownership that wants to go out and gain market share is going to be good for them.”

The sources said the plan for Tech Data is to keep its management team in place while expanding in certain areas it sees as ripe for investment, including cloud and Tech Data’s services business.

“Growing the cloud business by expanding the depth of the portfolio,” the source said. “Increasing our geographic presence. Growing services. All key parts of the investment thesis. That’s how we capitalize a company so it can be very nimble and flexible to do all of that.”

Tech Data partner Zac Paulson, CEO of TrueIT in West Fargo, N.D., said some private equity deals aim for the quick buck, promising innovation but failing to deliver. But if Apollo follows through, it could be a win for partners driving more competition into the marketplace.

“That makes sense for them to focus on cloud. I feel they need to right now as major distribution struggles with cloud a lot. I think that is why Pax8 is growing so rapidly. Tech Data, Ingram Micro, Synnex, D&H and the like all seem to be really rooted in hardware and perpetual licenses. They can't seem to grasp making cloud transactions easy. It should be as easy as subscribing to Pandora is on the consumer side.”

Hume said unlike a strategic acquisition in which two companies are “smashed” together, Apollo is in it for the long haul, and wants to keep Tech Data intact and grow the business.

“When you look at Apollo, they’re absolutely interested in taking Tech Data where it is today, and allowing it to continue to be leadership and an even a bigger powerhouse within the market,” he said. “We, as a management team, find very attractive the way they run and manage their portfolio and we know that it's going to be a great opportunity for us moving forward.”

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