M&A warning for channel firms

After a frenetic burst of consolidation across the voice and data channel over the course of 2008, acquisitive VARs have been urged to tread carefully this year.
Vendor consolidation was commonplace last year with notable deals including networking vendor HP ProCurve’s acquisition of wireless LAN (WLAN) specialist Colubris.

Another WLAN vendor involved in merger and acquisition (M&A) activity was Trapeze, which sold out to cabling manufacturer Belden for $133m (£87m) in June.

Carrier Cable & Wireless (C&W) spent much of the summer courting rival Thus, which resisted the advances until October, when a £330m deal was agreed. Another acquisition saga was vendor Brocade’s $2.6bn deal to buy networking specialist Foundry, which went through last month after the originally agreed price fell by $400m.

Comms consolidation

Prior to the deal going through, Rob Bamforth, principal analyst at Quocirca, claimed C&W’s buyout of Thus would benefit the UK telecoms landscape and keep BT on its toes.

“Takeover bids are an indicator that there is some need for change in the landscape,” he said. “In any industry, if you are not careful you end up with a 60/30/10 split: a dominant player, a number two and everybody else.”

Later in the year, Mark Swendsen, vendor ShoreTel’s EMEA managing director, predicted that 2009 would see further consolidation of telephony vendors. “We will see more consolidation in this market for the legacy player set,” he said. “There will be continued consolidation for TDM players.”

Consolidation in the distribution arena last year included Surrey-based MTV Telecom selling up to US titan ScanSource in April. Another giant US distributor to dip its toe in the UK market that month was Brightpoint, which bought wireless specialist Hugh Symons Telecom in a deal worth £3.6m.

VARs involved in M&A activity included Minx, which was bought by corporate reseller Insight Enterprises for $1.5m in July and s2s, which was acquired by services specialist Bailey Teswaine for an undisclosed sum in January. Integrator 2e2 closed its fifteenth acquisition since 2002 when it nabbed security and managed services specialist Netstore for £57m in August.

Changing landscape

Business development director of 2e2 Nick Grossman said the M&A landscape would look a lot different this year as the economic situation worsened. He indicated that concerns from both buyers and sellers could see a slowdown in consolidation.

“Unless firms have a very particular requirement, they will not voluntarily go for consolidation,” he said. “Businesses are also less likely to go shopping for people.

Consolidation will not stop completely, but it is much more difficult to get funding and people will increase the focus on their core business rather than trying to acquire.”

Grossman predicted VARs looking to buy may wait until later in the year to get a clearer picture of the market. He also cautioned channel firms to take a long, hard look at possible acquisition targets.

“There are businesses out there that have become substantially more affordable,” he said. “But you still have to make that business work for you and integrate it. When firms are punted at you, your immediate thought may be: what is the problem that I am going to inherit?”

Telecoms firm Chess has made 29 acquisitions in the past five years and closed five deals during 2008.

Director Richard Btesh indicated the firm would continue growing acquisitively, but predicted M&A activity in the industry would start to slow this year. He claimed spending time searching for struggling firms available at a reduced price was something of a fool’s errand.

“The landscape has changed and there has to be realism,” he said. “It is better to buy a company that is doing well at a fair price than to always look for bargains.

Deals between larger vendors are where the main bargain hunting will take place this year, while the mid-market is probably where consolidation will continue most rapidly.”

A question of timing

Cisco Gold partner ANS recently secured a £5m loan from the Bank of Scotland with which to target acquisitions. Chief executive Scott Fletcher claimed firms looking to buy could “make hay” with many companies needing to sell at reduced prices.

Fletcher was another to predict that many acquisitive channel firms would wait for prices to bottom out and M&A activity would hit full tilt in the autumn.

“The recession is tightening its grip and we are going to see a lot of opportunities with people putting businesses up for sale,” he said.

“There are also people who started IT firms 20 years ago that were always planning to sell at this point. ANS has cash in the bank and access to funding. The question is: when is the right time to pounce?”