The UK channel is consolidating at a rip. Most activity is taking place among big players, backed by either the stock market or by rich US parents.
This torrent of mergers and acquisition activity presents a great opportunity for resellers with skills in demand, or a dominant position in their market sector, to make their millions through a trade sale.
Market consolidation also represents a big threat to many resellers keen to retain their independence. Acquisition is a game that small resellers should consider playing too - especially if they are to secure their position in the face of ever-growing and stronger competition. Small UK resellers need to grow, however comfortable the niche they occupy currently appears. And acquisition or merger is the fastest way to grow.
Merger appears to be a no-brainer way for smaller companies to gain scale and find complementary skills. Systems Team, in Maidenhead, and the SSH Partnership, in Marble Arch, are examples of companies that have used merger as a way of growing.
This may be the cheapest, but not necessarily the easiest, option.
Smaller resellers are often more concerned to knock the hell out of each other than to join forces. Egos get in the way of more mergers in the channel. Reseller principals may be entrepreneurial, but many are also control freaks. They want to own 100 per cent of their business.
But as Ken Olisa, head of Interregnum Venture Marketing, based in Baker Street, London, says: "Do you want 100 per cent of nothing, or a smaller percentage of a lot of money?"
Resellers come in all shapes and sizes, they make all sorts of claims about adding value, and they can come up with 101 ways in which they are unique. But the overwhelming majority share one thing in common - a lack of liquidity. Independent UK resellers are under-sized, and under-nourished, and their growth is stunted by their inability to generate enough cash from internal resources.
Acquisition activity usually involves capital raised from external sources - the channel has trouble enough funding every day working capital requirements, let alone finding the wherewithal to buy other companies.
Venture capitalists and banks supply the most usual sources of capital for resellers.
The stock market is also a useful route for big companies - u20 million plus - with long track records. The latest reseller to join the UK stock market is Action, the u100 million mail-order supplier, which is making its debut through a reverse takeover of Standard Platforms, a tiny Lancashire-based imaging specialist, which shares ownership with Action. But a full listing can be phenomenally expensive - it is rare to see change from a million pounds once the battalions of advisers have got in on the act.
The Alternative Investment Market is a very promising avenue - particularly for resellers that own technology - such as a branded software product with strong penetration in a vertical sector. The AIM market is just one year old, but already nearly 200 companies have raised more than u3 billion from the market. The most successful launches so far have been brewing companies and technology stocks.
Nasdaq, the US junior market, is also a useful avenue: in April, Planning Sciences, the London-based developer of EIS systems, raised $16 million from Nasdaq. US brokers expect at least eight more UK technology companies to make their IPO (Initial Public Offering) on Nasdaq this year.
Vendors are an occasional - if unreliable source of capital. Apple and Digital Equipment have both brokered mergers in their respective channels.
But this activity is typically a defensive manoeuvre when vendors owed a lot of money by resellers who can't pay, demand a change of ownership as their price for debt forgiveness.
Buying companies through factoring is a common if risky device. Factoring companies, typically operated by the self-same banks that turn down reseller pleas for more money, take care of cash flow by forwarding upfront 75-80 per cent of the value of the invoice issued by their customer. The factor takes ownership of the invoices as its security. This is a useful device - but it can be expensive, particularly to companies that lack a strong track record. And woe betide the company whose sales fall.
Lantec, the Langley dealership, now part of the US group Elcom, engineered a management buyout from JWP in 1994 using factoring. And Rapid Networks, the u6 million Crawley reseller, used factoring to pay in part for the 1995 acquisition of an Applecentre in Cambridge.
Rapid Networks is a relatively small reseller, but it is actively investigating acquisition opportunities and sources of finance. Managing director John McCartney has assembled a multimillion war chest from private investors to acquire more companies. But Rapid is very much in the minority.
A survey recently published by the US channel marketing firm Global Touch, reveals the European channel suffers from a lack of credit that is endangering the industry's growth prospects.
Fifty eight per cent of distributors, and 44 per cent of vendors thought their resellers lacked adequate funding. The respondents attributed the cash famine to lack of third party financing and limited awareness or willingness on the part of resellers to find alternative financing.
The Global Touch report shows the European channel funds itself largely through equity or bank loans, while US resellers rely on third-party or vendor or distributor programmes for up to one third of their financing needs.
This may be a telling observation, but the difference is easily explained: European banks form a very simple stumbling block which stops third-party financing companies from funding European channel companies more actively schemes are typically underwritten by finance companies, which take a charge against the loans made to resellers. Finance companies insure against potential loss by owning part of the borrower's receivables - (outstanding debtors) until the money is paid. In the UK, the banks are typically the most important source of initial finance for start-up companies, and they take a charge against the borrower's assets. They will protect their preferred creditor status from all comers.
There is nothing intrinsically wrong in the UK banks' stance. And the overdraft remains the most important source of working capital. Banks are quite properly, risk averse - but they are also over-cautious in the way they assess risk when lending to channel companies.
In practice UK banks restrict the ability of resellers to operate at full stretch. Banks do not like lending large amounts of short-term money to asset-poor resellers. The debtors' book is the most important asset of most resellers - and banks like to secure their money against bricks and mortar. Most resellers rent property and even if they have bought their business properties, they do this usually through their tax-efficient private pension schemes, as opposed to their companies.
UK distributors are coming up with better and stronger credit programmes for their customers. At the forefront are the broadlines - Merisel, Frontline, Ingram Micro. But so long as UK banks continue their status as preferred creditors, the distributors will find their room to manoeuvre on credit somewhat limited.
Denise Sangster, Global Touch president, said: "There are no easy solutions but if the industry continues to ignore the problem, credit-worthy channel partners which lack deep financial pockets may disappear, resulting in consolidation and increased cost of market access."
This is happening already. But is it necessarily a bad thing? Many successful resellers that are active today set up with very limited resources. Bytes, of Epsom, P&I Data Services of Harefield, Middlesex and Lapland, set up sometimes with only hundreds of pounds worth of savings. Some players got into the market early enough - and by early we mean the mid-1980s - to be able to make big bucks. Harry Thuillier, managing director of Fraser Associates, the Buckinghamshire reseller and distributor, set up the company on the back of a highly profitable Osborne franchise. The huge profits from those days meant Fraser Associates could plough back investment into the company, and even make an acquisition or two, without recourse to the banks. Thuillier told PC Dealer last year that he would need u5 million to set up Fraser Associates from scratch. But how many financiers would lend someone u5 million to set up a dealership these days?
But raising money is not as daunting as it may appear, according to Interregnum's Olisa, who last year advised 24 firms how to do just that.
Successes included $1.2 million raised for Virtual Nightclub, a multimedia CD-ROM developer, from Phillips, and $32 million in venture capital from US firm Warburg Pinckus, achieved in partnership with the deal brokers Broadview Associates, for Sheffield specialist retail software specialist BACG.
The higher the perceived value of the company, the more capital it will raise. Interregnum specialises in maximising company value - often teasing out what is already latent within its clients. Olisa says company value is determined by four pillars: people, technology, market base, and brand.
Companies find it difficult to raise capital, according to Olisa, because of inadequate preparation. Firms write up their business plan, identify a need for extra resource, and jump straight into the capital-raising fray. But they miss out several fundamental steps in the process, Olisa says. Business plans may contain good ideas, but external finance sources need more than that, before they part with their cash.
They want proof in the form of market strategy and analysis, and proper business plan development.
Olisa confidently proclaims: You only need two things to raise capital: a good idea, backed by a credible business plan. "Venture capitalists only care about the people," he says. UK companies are, he says are "under-marketed, under-resourced and under capitalised - US companies may be inferior in all aspects but they think nothing of raising a million dollars to set up. Interregnum supplies the antidote to that syndrome."
Gordon Towell, chief executive of Granada Computer Services, and a non-executive director at stock-market listed Compel, met two networking resellers at Comdef 96 he was interested in buying on behalf of Compel - both of whom were interested in being bought. Towell predicts that many big resellers will need to bolster their high-end networking capability through acquisition. Compel's most recent acquisition was Metrocom, from Ingram Micro, with whom it shared a couple of key customers.
Specialist Computer Holdings is another occasional acquirer. In May, it paid u3 million for Computer Support (UK), the maintenance and engineering subsidiary of Network Si. The acquisition doubled the maintenance revenues of SCC, the company's corporate reseller business, to u24 million, brought in an extra 300 staff, its first outlet in Northern Ireland and a stable revenue stream with the acquisition.
P&P is very active in buying IT companies. In recent years it has acquired Computers for Business, Scotland's second biggest dealership, QA Training, the UK's top technical training company, and Myriad, and IT recruitment agency.
There are also some active North American buyers in the market. SHL Systemhouse last year bought Watford-based PCL's outsourcing business to fold into its UK facilities maintenance business. And it acquired Planning Consultancy, the u60 million reseller (and unrelated to PCL) for u15 million, which it merged with its product deployment subsidiary SHL Technology Solutions.
Elcom, a Boston-based reseller last year bought Lantec, a UK top ten UK dealership (which a few months earlier bought Rapid Recall from Metrologie).
This year it bought AMA, a u25 million reseller, based in Basingstoke.
Jim Rousou, former Lantec managing director, and now a main board director at Elcom, has more money at his disposal to buy UK channel companies, funded by the cash injection the company received last year through an IPO or initial public offering on Nasdaq, the US junior market.
Network Imaging, a US specialist CAD and document management reseller, made its UK debut through the acquisition of four UK dealerships - Autocim, KGB Micros, Art Systems and Huntsbury Micros.
US resellers have more money to spend than their UK counterparts because a) they are bigger and b: investors are more willing to take a punt. And US IT companies are typically valued at 20 times earnings, compared with an average of 12 times earnings in the UK US stocks are valued more highly, because American analysts have more data to make meaningful comparisons than is possible in the UK. The US has many more so-called 'pure-play' companies, Benedict Tompkins, a principal at the IT mergers and acquisitions specialist Broadview Associates, points out. "The US market is six times the size of the UK - it is a lot easier for a US company to grow very big doing just one thing. While a US company could grow to $100 million doing nothing else but payroll systems, a UK company in the payroll market would have to do many other things to achieve the same size."
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