4 Key Takeaways From Office Depot’s Sale Of CompuCom

2022 is only a couple days old, but the IT business is already showing signs of a wild ride. Following is more about the transaction and what it may mean as the MSP industry is in the middle of a widespread move to consolidate.

Sale Of CompuCom Part Of A Larger Dance Between ODP And Staples

ODP, the parent company of Office Depot, very quietly unveiled the sale of its CompuCom business with an announcement late in the day on New Year’s Eve. Despite the timing of the news, it foreshadows major longer-term changes in the IT and office supply industries.

The sale of CompuCom had been expected for a year starting with Staples’ January 2021 bid to acquire Office Depot. Staples said it was interested only in the retail part of Office Depot, which seems to have set in motion a series of moves by ODP including the CompuCom sale, which would rid the company of an MSP and systems integration business, and a split of the rest of the business into separate retail and B2B operations.

Looking into 2022, it is easy to imagine that Variant Equity Advisors could leverage CompuCom as a platform for further consolidating the MSP industry, as several other private equity companies have been doing recently.

In addition, Staples could acquire the Office Depot retail side of the business, further consolidating the office supply and business services industries.

2022 is only a couple of days old, but the IT business is already showing signs of a wild ride. Following is more about the transaction and what it may mean.

CompuCom Instantly Becomes A Major MSP

CompuCom, despite its acquisition by retail-focused Office Depot since late 2017, is still a powerful player in solutions integration and managed services. CompuCom in 2017 had about $1.1 billion in annual revenue before it was acquired. ODP in August 2021 reported CompuCom sales for the second fiscal quarter of 2021 of $222 million, which was up 4 percent over that of the second quarter of 2020. However, CompuCom reported $3 million in operating income for the quarter, down year over year from $4 million.

More recent financial information on CompuCom is not available. Starting in the third fiscal quarter 2021, ODP presented CompuCom as discontinued operations.

CompuCom’s revenue makes the company one of the largest independent solution providers and MSPs in the world. With the acquisition, it will be free to make its own mark on the industry.

CompuCom May Make More Acquisitions

The MSP industry is in the middle of a widespread move to consolidate. A big part of that consolidation is a move by private equity to invest in an MSP with the purpose of rolling up smaller MSPs via acquisitions to build larger organizations. This comes from the realization that managed services is actually a very profitable business with the Holy Grail of cash flow: recurring revenue. MSPs have been traditionally very small companies, leading to a fragmented market. But the arrival of private equity means that over time there will be fewer but larger companies offering managed services.

2021 saw several examples of this trend:

MSP Corp Investments, a company founded to acquire multiple MSPs while letting them continue to operate as stand-alone businesses, in October closed a new $35 million round of funding to help bring more managed service providers into its organization.

Private equity investment firm Evolute Capital and family investment firm Hunt Technology Ventures, both based in Dallas, combined to purchase a majority stake in Mt. Pleasant, S.C.-based eGroup as part of a plan to build a larger channel company.

Electric, a New York-based MSP, in February closed a new round of venture capital funding to the tune of $40 million as a way to expand its R&D, sales and marketing capabilities and finance its hunt for more acquisitions.

CompuCom, under Variant Equity, may expand via further acquisitions in the MSP space.

ODP Becomes A Leaner, More Focused Organization

ODP has been moving to reorganize itself into a more focused organization.

The sale of CompuCom, which has been expected since early 2021, takes ODP out of the MSP and systems integration business.

ODP, which in June 2021 unveiled a plan to split into two separate businesses, in August detailed that split, which is expected to happen in the first half of 2022.

The ODP Corporation is slated to become a B2B solutions provider serving small, medium and enterprise companies. It will include the contract sales channel of ODP’s current Business Solutions Division, which will be renamed ODP Business Solutions, and Varis, ODP’s newly formed B2B digital platform technology business. ODP will own ODP Business Solutions and Varis, but they will be operated as separate businesses.

Office Depot will become a provider of retail consumer and small-business products and services sold through about 1,100 Office Depot and OfficeMax retail locations and the officedepot.com e-commerce platform.

Deal Paves The Way For Staples To Acquire Office Depot

In January 2021, Staples unveiled a proposal to acquire Office Depot. However, Staples, in its letter to Office Depot, made it clear that the company was not interested in the business-to-business aspect of its rival.

In that letter, Staples proposed that Office Depot divest itself of one or both of its business-to-business units as a way to increase its value.

“We may increase our proposed valuation (i) for logical strategic divestitures that ODP may execute to unlock value, such as the sale of its CompuCom business and/or (ii) if ODP conducts a comprehensive sale process for its U.S. commercial business unit (the ‘B2B Business),” Staples wrote.

With the sale of CompuCom and the coming split of its rival‘s business, the ODP Corporation and Office Depot seem to fulfill the needs of Staples, giving Staples an opportunity to make a play for the Office Depot side of the business.

Office Depot, meanwhile, has never explicitly said “no” to Staples‘ 2021 bid to acquire the company.