The hunters have become the hunted
The recent flurry of channel acquisition activity is showing no signs of abating. However, as free-spending giants such as Matrix and Azzurri are snapped up themselves, Trevor Treharne asks if acquisitions are really the best way for firms to grow
Although market consolidation remains rife in the communications channel, the type of consolidation taking place has seen a complete U-turn over the past few weeks. Now the hunters have become the hunted.
Two of the channel’s most acquisition-hungry firms, Matrix Communications Group and Azzurri have been swallowed up by Irish VAR Calyx (CRN, 22 May) and private equity firm PPM Capital (CRN, 12 June) respectively. Both cited similar reasons for the take-overs; the ability to invest in further acquisitions to become a more complete convergence provider.
Despite Matrix and Azzurri’s previously acquisitive outlook, both looked to be acquired to fast-track their convergence transformation strategies. This is not an indication that acquisitive resellers will ultimately need to sell out to survive, but more that VARs need true fiscal muscle to thrive in the communications channel.
So are acquisitions the best way for resellers to flourish in the communications channel?
Ian Smith, former chief executive of Matrix, who assumes the role of non-executive chairman of Calyx after the acquisition, said: “We are committed to the consolidation model. I believe this market is rapidly maturing, and there will be some runners and fallers.”
Smith said Calyx [post Matrix acquisition] has now joined the ranks of Dimension Data, Damovo, Azzurri and Logicalis, as a major integrator in the UK.
“We allowed Matrix to consolidate with Calyx,” he said. “We accepted the fact that Calyx was better positioned than us from a financial point of view.”
Smith said the next wave of consolidation will see telcos buying the major integrators, as the market moves towards more converged service. Smith cited BT’s acquisition of VAR TNS as a recent example (CRN, 7 November).
The future direction of Matrix has now been handed over to Irish VAR Calyx, which established its UK presence after it acquired Cisco and Nortel reseller ITS Technology Services last year (CRN, 31 October). Calyx has now jumped feet first into the UK market after snapping up Matrix. Despite paying £40.5m in cash and shares for the firm, its UK acquisition footprint is set to continue.
Maurice Healy, chief executive of the Calyx Group, told CRN: “There is a realisation in the Azzurri and Matrix-Calyx space that for a long time we were the non-sexy part of the industry. However, it [the communications market] is now seen as the biggest channel for players from other spaces.”
Healy said the scale of a firm is an important aspect to building a successful integrator business.
“You need customer bases and recurring revenue,” he said. “It takes a long time to build these without acquisitions. If you want shareholder value, scale is where it’s at.”
Healy said Calyx now plans to grow through a mix of organic growth and acquisitions. He insisted that organic growth is still an important part of Calyx’s plans.
“Our model is based on gaining a broad spread of customers,” he added. “We look to acquire firms that have wide customer bases, a presence in the mid-market, have good recurring revenue streams and can add value with skill sets we don’t have.”
Calyx’s entry to the UK market will see it rival other large-scale channel players such as Azzurri, Logicalis and Damovo. The swift development of Azzurri was recently laminated after its £182.5m equity buy-out by PPM Capital. Established in 2000 and 15 acquisitions later, the VAR is now hoping the backing of PPM Capital can continue to boost its business in the same way as former investment backer 3i.
Martin St Quinton, chief executive of Azzurri, told CRN that after the VAR’s recent private equity buyout it plans to use the backing of PPM to build on its previous acquisitions.
“The deals we have made in the past have been with firms with a turnover between £1m and £20m,” he said. “We won’t stop buying in this bracket, but we will work on some more upscale acquisitions in the £20m to £50m turnover bracket.”
VAR Logicalis also looked to boost its business through acquisition, including IBM reseller TBC (CRN, 26 Sepember) and Hewlett-Packard partner Hawke Systems (CRN, 2 August).
Ian Cook, chief executive of Logicalis, said: “Our strategy is not to dominate the market, but to increase our offering to our customers as the market develops. We try to make sure we are anticipating the market trends. We are adding new skills via acquisitions by looking at what we need to fast-track.”
Cook insisted Logicalis uses acquisitions to add to its capability, not just bulking up for the sake of it.
“Our revenue has grown from £340m to £545m, with only £105m coming from acquisitions,” he said. “That shows some 16 per cent of organic growth that has been ach-ieved simply through picking the right technology.”
Despite the bullish approaches of Calyx, Azzurri and Logicalis, not all large channel players insist on acquisitions as the only means to fast-track their businesses in the communications market.
Paul Renucci, managing director of Damovo, said: “Our approach is one of organic growth. An organic strategy can often provide more lasting growth and enables us to successfully build within our business.”
Renucci said acquisitions can prove dangerous if certain aspects of the acquired business, such as people, do not integrate successfully. He also insisted the acquisition plans of Damovo’s rivals do not concern him.
“Acquisitions will give them velocity but it is not about how quickly you get off the mark, but the end result,” he said. “We have looked at a few [potential acquisitions]. We might make one if it was the right opportunity, at the right price.”
The acquisition game is not just for the larger players. VARs of all sizes are looking to consolidate in the comms channel. Other highly acquisitive players include Chess Telecom and ATC Communications.
VAR Chess recently completed its 12th acquisition in only two years after buying the customer base of specialist voice reseller United Worldwide Telecom (CRN, 13 March). Chess has concentrated its acquisition path on the lower end of the reseller market, but has shown no signs of halting its acquisitive approach.
Richard Btesh, director of corporate finance at Chess, said: “Acquisitions give us the customers we are able to service and enhance our gross margin. Some resellers want to cash-out of the market and we encourage this.
“I don’t know quite what animal we become after we hit the £100m mark with our turnover, but over the next three to four years we will continue to acquire.”
Earlier this month, VAR ATC Communications acquired voice and data reseller Britannia Telecom for £3.84m (CRN, 5 June). Previously ATC has bought virtual network operator T-Liaison (CRN, 18 January) and voice and data reseller Sterry Group (CRN, 14 November).
Alex Tupman, chief executive of ATC, told CRN at the time of the Britannia acquisition: “We are always looking for acquisitions that can add to our resources. I would be surprised if we don’t make another acquisition by the end of the year.”
Tom Perry, head of marketing at reseller Freedom, which acquired VAR The Telephone Company last year (CRN, 14 November), said he expects consolidation to continue.
“With acquisitions you get skills and a customer base at the same time,” Perry said. “You have to move quickly. Organic growth is fine, but you have to be exceptional at it to grow at the same rate as acquisitive firms.”
Russell Lux, managing director of VAR Luxtech, which acquired telecoms reseller CSS last September and added Apple VAR Topology last week (CRN, 12 June), said: “An acquisition strategy is the only one that works. You have to be a sizeable organisation to get the business.
“We want to grow as quickly as possible through acquisitions and there is still a lot of room for consolidation in the market.”
Grahame Smee, managing director of distributor equIP, which was acquired by Matrix (CRN, 10 January 2005) and then sold off to Horizon Technology Group (CRN, 6 February), said: “Acquisitions are the quickest way to grow, while organically is more difficult. Acquisitions give you mass quickly, but you may have to change your business model.”
Smee said consolidation is likely to continue for ‘Super VARs’, such as Azzurri, Logicalis and Matrix-Calyx.
“This consolidation leaves a difficult role for distribution, as vendors will have more direct touch with these Super VARs,” Smee claimed. “As this happens, the squeeze will be on the broadline distributors.”
Keith Humphreys, managing consultant at analyst EuroLAN, said: “All of the big firms have been making acquisitions. It is the main method to grow business and get customers.”
Humphreys said acquisitive VARs need to acquire in the managed service sector to continue their growth.
“We are going to see acceleration in acquisitions,” Humphreys added. “There will be more consolidation in every part of the chain leading to the end-user.”
Funding channel acquisitions is traditionally sourced in three ways. VARs Freedom and ATC have favoured the approach of borrowing funds from Barclays bank. Other options include floating on the stock exchange – an opportunity taken by Calyx, which floated on the Irish Stock Exchange just before the Matrix acquisition and raised £17.5m. This follows its listing on the Alternative Investment Market in March last year, which raised £7.25m. The third alternative for resellers is to seek private equity backing, an approach favoured by Azzurri.
However, there is a dangerous element of risk to making lots of acquisitions. In 2004, VAR Logcom went into administration after it had pursued an aggressive buying strategy. The firm attempted to acquire five VARs in as many months. However, the strategy failed after one of the firms bought by Logcom went under, taking the rest of the company with it.
Management experience is also crucial to a successful acquisition strategy. Azzurri’s St Quinton has acquired more than 60 companies during his career. During a six-year period at office equipment firm Danka, St Quinton acquired more than 50 companies in 30 different countries.
It is this level of experience that has enabled Azzurri to make 15 acquisitions and grow at such a rapid rate. Now after only six years in the market, the firm was able to command a hefty acquisition fee of £182.5m from PPM.
Working hard towards organic growth is a safer method to grow a reseller business. However, getting
the right fiscal backing, the market knowledge and a savvy management team in place can make acquiring in the communications market the best method to fast-track up the ladder to Super VAR status.