Despite the seemingly endless stream of elderly US people touringq Europe, some of their compatriots never actually leave their home country for good. Maybe they see no need to go beyond the range of experience that a country as huge as the US offers and some US companies also do very well by just supplying their own vast local markets. But for others, this isn't enough.
Retail companies such as Insight Enterprises and Global Direct Mail (GDM) come into this category. Both are acquisitive, expansionist and keen to get what they can from the UK and European markets. Both have added to their global reach by making acquisitions in the UK.
Last month, Insight unveiled an agreement to acquire Action Computer Supplies, creating a global marketer of hardware, software and services.
Subject to shareholder approval, the deal is expected to be completed by September. The combined companies have annual sales of about £1 billion.
Insight, based in Arizona, is by far the larger of the two, with sales for the year ended 31 March 1999 of £709 million. Action's sales for the 12 months ended 28 February were £288 million.
The deal followed closely behind Action's disclosure of disappointing results for its first six months ended 26 February - its pre-tax profit fell 12 per cent to £2.7 million for the period, compared with £3.1 million for the previous year's interim. The profit fall came despite increased sales, up 30 per cent to £141 million. The dip in profit was blamed on a £693,000 charge relating to the acquisition of Fraser Associates, investment in infrastructure and a downturn in PC sales to its larger customers.
At the time of the interim announcement, Action confirmed it was in talks with a potential buyer. Speculators - including PC Dealer - guessed rightly that the purchaser would turn out to be one of the acquisitive US companies such as Insight or GDM, the latter having a wide multinational presence and turnover in excess of £500 million.
But GDM has already dipped into its pocket this year. In February, it announced its fifth acquisition in nine years with the purchase of Simply Computers, the London mail-order and retail operation. Les Biggs, vice president of European operations at GDM, said of the deal: 'It will enable us to expand our e-commerce capabilities, as well as introduce private-label systems to Europe. It makes GDM the number two catalogue reseller in the UK.' GDM already had a stake in the UK market through Misco, which targets the corporate sector.
Apart from the Insight and GDM deals, there was also much speculation surrounding Office World as a potential acquisition target at the start of the year, with US giant Office Depot rumoured to be a likely buyer.
Eric Born, managing director of Office World, admitted in January that the company was in discussion with third parties but said no binding agreements had been signed. However, six months later, there appear to have been no further developments and a representative for Office World says the reports in January were based on 'speculative comment'. He adds: 'Most companies are talking most of the time.'
But Office Depot is no stranger to the local scene, having made its first foray into the UK last August with its £1.875 billion acquisition of Viking Office Products, a multinational with operations in 11 countries, including the UK, through its subsidiary Viking Direct.
The most recent acquirer, Insight, sees plenty of opportunities arising from its purchase of Action. 'This merger vaults Insight to the next level and creates a global direct marketer of brand name computer products and services with business customers in the US, Canada, the UK and Western Europe,' said Tim Crown, president of Insight, when announcing the deal.
'It represents the continuation of our strategy of expanding our customer base and geographic scope. Action is an innovative company and well positioned in the UK. This is our largest transaction to date and Action gives us access to the mass market in the UK, which we entered in 1998.'
That entrance was achieved through the purchase of Choice Peripherals in April 1998. Insight also took an 85 per cent stake in Choice's internet provider, Plusnet Technologies.
Valerie Paxton, vice president of corporate communications at Insight, says the US group had been attracted by reports of an expansion of the UK PC market, coupled with an increase in business migration to the Web. The common language, and speculation that the UK could become a decentralised call centre for the European Union, was reported to be an added attraction. Insight didn't rush into Europe lightly, having spent two years considering possible acquisitions and researching the European SME market.
Insight's research and understanding of the UK market enabled it to identify Action as a good fit.
As Crown explains: 'Action's business model is complementary to our own and we have the opportunity to capitalise on our experience in the US to maximise its sales and operating performance.'
Insight believes it can consolidate Action's position as one of the largest independent direct marketers of IT products in the UK through the integration of Insight's existing operations, forming the platform for its growth objectives.
Size also brings economies of scale. 'We believe we can increase our combined buying power to realise purchase savings, improved vendor support and product availability,' Crown says. Insight will also be bringing its own techniques to the way Action does its business. It believes it can enhance Action's sales growth by implementing its 'account management and outbound telemarketing strategies, leveraging Action's extensive client relationships'. Insight describes itself as following 'aggressive marketing strategies'.
That approach, combined with its knowledgeable sales force, streamlined distribution and advanced proprietary information system has resulted in high customer loyalty, it claims. Insight also identifies Action's business customer base as a useful source to tap to enhance its UK ISP and e-commerce service sales.
'We believe we can capitalise on the sales and marketing expertise of our organisations by integrating catalogue and e-commerce operations,' Crown said, when completing his summary of benefits arising from the deal.
As corporate financiers know, mergers and acquisitions are more likely to be successful where there is a common approach to business and similar management philosophy. Insight thinks it has found this at Action. 'Action's management team is talented, internationally experienced and will enhance the strength and depth of our own,' Crown explains. 'Our management teams have a similar culture and share a common vision of creating a global organisation.'
Henry Lewis, chairman of Action, adds: 'Action and Insight will create a genuinely global group with extensive customer bases in five countries. We will take advantage of our common ground to increase our margins and accelerate our sales growth.'
George O'Connor, research analyst at investment banking group Granville, believes there will be more US purchases to come. 'The pressure of globalisation means the bigger you are, the better you are,' he says. Size brings improved purchasing power, he explains, and the ability to offer more of a service play to customers.
He continues: 'The second driver is that European companies are becoming less expensive so they are more interesting to purchasers.'
Clive Longbottom, analyst at Strategy Partners, also sees a stirring among US players. 'I think we will see more market entrants and they are all going to be acquisitive,' he says. Entering a market by acquiring an established player has obvious advantages. Purchasers gain an immediate presence and established customer base.
'Insight took a view that it would buy its way in, so it is making a good base to work from, with known clients, and a retail and corporate angle,' says Longbottom.
Buying up a UK company has the obvious attraction that it avoids language problems and reduces the chance of cultural misunderstandings. But US companies could also be attracted by the UK due to its proximity to continental Europe. 'It's certainly the case that, now we are moving towards the single European market being a reality, the Americans are taking more interest,' says Longbottom.
However, while Europe is often considered a uniform market by US companies, despite the best efforts of Brussels bureaucrats it remains far from that.
Different modem standards and power supplies are just two of the problems that US competitors aren't used to dealing with at home. Even in Europe there are those who doubt if European monetary union will succeed. If continental economies look uncertain, foreign companies will be more wary of entry.
'In the US, you have your different states but they all speak the same language and use the same currency,' Longbottom explains. 'It's a totally single market. As soon as you come over to Europe, you have different languages, the logistics are different. Choice and Action are still very UK-focused. Insight could still get its fingers burnt if it thinks this gives it a springboard into continental Europe. But if it buys businesses in France and Germany, then it could possibly start something very big.'
Market consolidation and the advance of the US resellers into the UK and Europe is in line with the trend for distribution as well. Take the move by Tech Data last year to buy control of pan-European distributor Computer 2000. In the same week came the move by CHS Electronics to acquire Metrologie. Both deals suggested confidence about the potential for growth in the European market, as well as the need to achieve economies of scale to support margins.
So what are the implications for UK resellers? 'It's going to make life a lot more difficult for the smaller independents because they won't have the buying power,' predicts Longbottom. Giants such as Insight, with its mass-market outlets, will have far more negotiating power than a geographically focused independent. 'They won't be able to get the economies of scale.'
However, O'Connor points out that there is already price pressure in the UK. 'You could argue that it will be accelerated,' he says. Alternatively, if the market becomes dominated by a few players, they could potentially keep prices up.
The US incomers could have some impact on the market in other ways, such as marketing style. Insight's move from catalogue sales in the consumer market to cold-calling SMEs has already proved itself in its home territory.
Efficient marketing techniques reduce costs with a direct bonus for margins.
Customers may also benefit from the knock-on effect that increased competition may have on the quality of customer service, an area which companies such as Insight put considerable effort into. Free-phone links which enable customers to access the manufacturer's own support lines come as standard.
The arrival of US companies could also affect the market by encouraging greater segmentation. 'Typically, there are too many people chasing the same spend,' says O'Connor. 'Companies should be looking for more defined spaces. You tend to find that in more mature markets.
We haven't seen it in the UK yet, but it could be one of the results of US acquisitions.'
The potential impact that US companies can have when they enter the UK market was shown by Electronics Boutique, the US software and video games retailer, which snapped up the struggling Future Zone chain in the UK in 1995. Within a year, the US owner had turned its acquisition's £8.5 million loss into a £500,000 profit. By the second year, profit was up to £8 million.
But some leading players clearly have no interest in the UK scene. US retailer CompUSA has no plans to expand into the UK. 'Right now, we are not growing here in the US,' a representative for CompUSA says. 'We had a rough third quarter.' At present, the company is concentrating on getting things in order in its own back yard.
For some companies, direct sales over the Web rather than through stores could emerge as the preferred route for sales expansion. Last year, US reseller Egghead announced it was shutting its last 80 stores to become an internet-only operation.
Direct vendor Dell is due to launch its online superstore, Gigabuys.com, in the UK by the end of next month. The US equivalent opened in March offering 30,000 products, rising to 40,000 by the end of the year. The UK store will carry a similar range of products, including software, printers and cables. With plenty of direct sales internet experience under its belt, the move represents a considerable challenge for established UK resellers.
No one really knows how big an impact Insight and Global will have on the UK market, but players will be watching closely as the newcomers familiarise themselves with their acquisitions. And the betting is they won't be the last US retailers to cross the Atlantic.
But Steve Bennett, managing director of Software Warehouse, appears unconcerned about the acquisitions. 'Action was already a strong competitor. The likelihood is that it will do it more harm than good. I know a lot of directors there. They are very smart cookies but when you have some money in your back pocket it can take your mind off the business.'
He says Software Warehouse has been approached by potential acquirers, but he isn't tempted to 'sell out for a couple of million'. 'We don't feel under pressure at the moment,' Bennett claims. As for the strategic wisdom of growth by acquisition, he's not convinced.
'I like starting from scratch,' he explains. 'If you buy a business, it's hard to change mind sets and the culture. When we have acquired stores they have been the hardest work. So I don't like acquiring and I don't want to be acquired.'
Nevertheless, Bennett expects to see more US companies coming into the UK, as Wal-Mart has done with Asda. 'Every investor wants growth. But there comes a point where the numbers start coming down and the only thing you can do to keep shareholders happy is to expand abroad.
'I think we will see that in supermarkets, in the computer industry and other areas - a lot of US companies will make acquisitions. This is just the tip of the iceberg.'
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