Does 2e2's demise signal the death of buy-and-build?

Thoughts are with staff but lessons can be drawn from collapse of giant integrator, says CRN deputy editor Doug Woodburn

By Doug Woodburn

Following months of mounting speculation over its fate, today came the announcement that 2e2's 2,000 staff must have been dreading.

Though many in the channel may have seen it coming, it was still a shock to read confirmation that 2e2's UK subsidiaries entered administration today, placing a huge question mark over the future of what is one of the UK's true super VARs.

I say many will have seen it coming because distributors have for several months - if not the best part of a year - voiced concerns about trading with the Newbury-based monster, which hit £395m revenues in 2011.

Earlier this month, it became apparent just how much of a hole 2e2 was in as it announced the appointment of a new COO and CFO, presumably in the hope that either its spiralling debts could be restructured or the firm could be broken up.

A mere two weeks later, the worst-case scenario has been realised, although administrators stressed they will be seeking buyers for 2e2's overseas subsidiaries, which are not part of the insolvency.

Although FTI Consulting, which is looking after the administration, said it is "exploring options" for the UK business, whether this will lead to attempts to sell the whole company - perhaps without its yawning debts - or flog its parts is as yet unclear.

The scale of this insolvency cannot be played down. Putting aside the big casualties seen in the retail market such as Comet, this is by far the biggest insolvency the channel has seen in years and all you can hope is that something is salvaged from the wreckage.

2e2 was still of a modest size when I began covering the UK channel in 2007 and its future seemed bright back then.

Having only been founded in 2002, 2e2 was at that time among a pack of private equity-backed VARs thriving on a highly ambitious buy-and-build model, highly leveraged in some cases.

Azzurri, Calyx and Kelway were all part of the same PE-backed gang and the model seemed to be prospering at a time when the IT market was still growing handsomely and the channel was still in dire need of consolidation. Although publicly listed, Redstone harboured similar ambitions.

In 2007, 2e2 made its biggest acquisition to date, snapping up HP partner Compel for £53m in a move that took its turnover to £200m.

But it was really only a few years later when 2e2 made its big-ticket acquisition of Morse that it was clear the wheels were beginning to fall off the private equity-backed roll-up model, at least for those who couldn't service the debt they were accumulating with high enough growth.

But despite talk that 2e2 had by this stage taken on an unmanagable amount of debt, the firm had no intention of reining in its ambitions. Following the Morse buyout, 2e2 hinted at more acquisitions to come and set itself a turnover goal of £600-£700m within 2-3 years. By this time, Azzurri had long since scaled back its M&A ambitions, while Calyx was heading into administration after its own buy-and-build strategy hit the buffers. And at about the same time, Redstone initiated a fire sale of some of the assets it had bought during its M&A blitz after narrowly avoiding administration itself.

The ante was even higher with 2e2, given its loftier ambitions.

One could argue that the integrator was a victim of the economy. Back in 2008, when the credit crunch took hold, who could have predicted that - five years later - the UK would still be teetering on the brink of a triple-dip recession?

Because during the boom times, the model had every chance of working. With high enough sales and profit growth, I imagine that 2e2 would have had few issues keeping up with its interest payments.

But there is an argument to be made that, in what were uncertain times, the firm bit off more than it could chew.

Is 2e2's demise the final nail in the coffin for the buy-and-build model?

I would say not, although we may not see a project the scale of 2e2's for a while. More likely, we will see private equity continue to put its money behind channel entrepreneurs with more select or modest ambitions, particularly in areas that are still showing growth, such as cloud and SaaS. Current examples include Better Capital-owned M-hance (which used to be Calyx's software business) and Six Degrees.

This news is still very fresh, and more information will come to light in the coming days. In the mean time, all that is left to be said is that our best wishes are with the hundreds if not thousands of employees impacted by this news. We know that CVs have been flying around for a while, so we only hope the firm's talented staff find new homes soon if there is no future for them at 2e2.