According to research from insolvency firm KPMG, activity in the first half of 2006 for UK’s IPO market was up on last year (CRN, 5 July). The UK’s main market tally was 15 trading company IPOs, raising combined funds of £4.15bn – an increase on the 12 trading company IPOs raising £2.5bn during the first half of 2005.
The UK recently saw two of its largest channel players – reseller Logicalis and distributor Westcon Group – benefit from “complementary acquisitions” after their shared parent company Datatec floated on London’s Alternative Investment Market (AIM) (CRN, 23 October). At the time, Jens Montanana, Datatec’s chief executive, said the firm will move forward as “a pro-active consolidator in a fragmented market”.
But it is not just the larger players who are considering flotation. VAR Daisy Communications also outlined plans to continue its acquisition strategy by floating on AIM by the end of this year (CRN, 16 October). Reseller Azzurri also intended to float to arm itself with additional acquisition funds (CRN, 10 April) before completing a U-turn and being acquired by private equity firm PPM Capital (CRN Online, 2 June).
Another reseller that has hinted at a possible flotation is Freedom, which said it was considering whether to borrow funds from its current financier, Barclays Bank, float on the stock exchange, or seek private equity backing (CRN, 19 June).
Freedom had a common motivation for considering flotation, one shared by Logicalis, Westcon, Daisy and Azzurri, which was to gain additional funding to make further acquisitions. The market is rife with consolidation, and acquisitions in the channel require financial muscle. Floating on the stock exchange is one method to boost a firm’s disposable cash.
One of the channel’s main consolidators has been communications VAR Chess, which has completed 16 acquisitions in the past 31 months.
Richard Btesh, director of corporate finance at Chess, told CRN: “I have floated a number of companies and the reasons for doing it could be to gain access to capital and raise the company profile. If you have not been through the flotation process before, you should not underestimate the level of work needed to stay within the listing rules.”
Btesh said resellers have to consider the different reasons for listing, because if a VAR has a viable business model, then private equity backing could be a more attractive option.
“At Chess we have not made the decision between private equity backing or floating, but we may be doing that next year,” Btesh added.
“The rate of channel flotations will go up next year, because the AIM – the most likely stock exchange to be used – has been very successful this year and this attracts firms.”
However, Jess Thompson-Hughes, managing director of distributor React Technologies, said: “IPOs are not all that common in the channel. Most IPOs are from vendors as the majority of VARs and distributors are not large enough to do one.”
David Galton-Fenzi, group sales director at distributor Zycko, works with WAN optimisation vendor Riverbed which recently completed its IPO on the Nasdaq Global Market (CRN Online, 21 September).
“On the vendor front, the River-bed IPO has brought some substance to the vendor and sets out to the channel that Riverbed is in for the long-haul,” Galton-Fenzi said.
“Resellers and distributors rarely IPO, unless they are a very big established player that has been around for a long time and the owners want to cash out.”
Galton-Fenzi added that resellers are more likely to sell out to a larger channel player than float.
Alastair Edwards, senior analyst at Canalys, said: “IPOs go in waves. In 2000 and around the dotcom boom there were a lot of technology firms going public all over Europe and raising a lot of money. Since 2001, that has tailed off as the importance of IPO changes over time.
“The channel can appeal to investors when the vendor community is doing well, because the channel can ride on the back of that. This is what happened in the dotcom era and now this trend is coming back.”
Edwards said the AIM has been a successful outlet for smaller companies to float, which in turn has improved the overall popularity of AIM.
“Floating gives firms a cash injection and recognition,” he said. “There are still a few technology firms with an ambition to IPO, but I do not think we will see a huge rush.”
Edwards added the downside of an IPO is losing control of the company and this could be a disadvantage if a firm has a reputation as a privately-run business.
The likelihood of a glut of channel IPOs will remain in the hands of resellers keen on raising cash for acquisitions. Consolidation shows no signs of slowing. Floating will remain an option for acquisition-hungry VARs, but we should expect financial backing from banks and private equity investments to remain a common theme during 2007.
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