Now is not a bad time to sell up if you're a distributor or reseller, with valuations showing no sign of waning, attendees of this year's DISTREE were told.
Despite the depressed economy, IT businesses in Europe – including distributors – are still typically commanding a price-to-earnings (PE) ratio of up to 12, according to M&A advisers Regent Partners, meaning a distributor with annual net profits of £1m could sell for £12m.
DISTREE is the event where emerging IT manufacturers from all over the world come to ink pacts with prospective EMEA distribution partners, with 5,000 meetings pre-booked over the three-day event in Monte Carlo.
But it is also the perfect setting to network and, for some, learn more about potential M&A or exit strategies for their business.
Regent's talk – billed as a "must-attend session for anyone looking to buy or sell a technology or channel company" – was well attended, with at least a few familiar faces from the UK channel spotted in the throng.
Regent partner Pradip Somaia said his firm had advised on scores of channel buyouts, including that of Altimate by Arrow and IQ Sys by SCH, as well as the M&A roll-ups currently being performed by UK managed services outfits Accumuli and Lumison.
The tech M&A market shows no sign of slowing in Europe, Somaia said, with 600 to 700 deals still being transacted each quarter. Likewise in the distribution sector – which for Regent encompasses both distributors and resellers – the quarterly deal rate has remained at about 40 to 50, with the number of deals even rising slightly through 2012.
Regent also captures the value of these transactions.
Distributors are typically still commanding a PE ratio of 10 to 12, depending on whether or not they can demonstrate "value enhancers" such as repeat revenues, specialist skills, market positioning and commitment of management to stay on. Those heavily focused on product sales, one-off contracts and who work in markets that are consolidating and have a low barrier of entry, may be looking at a PE ratio nearer five, Somaia warned.
"Valuations have not collapsed; the trend is looking steady," he confirmed.
There's gold in them there hills
Somaia said that distributors, which may work on margins of just one or two per cent, typically command a price-to-sales ratio of 0.2 to 0.4, meaning a distie with £100m turnover may go for £20m to £40m.
This is much lower than other types of channel firms, with SaaS firms – which may work off 10 to 20 per cent margins – typically looking at a price-to-sales ratio of four to 10, depending on whether they punt fast-moving items or big-ticket contracts with a longer sales cycle, Somaia said.
Somaia admitted that stricken UK IT services outfit 2e2, which was private-equity backed, had tried to get "too big, too fast" but claimed there is no shortage of private equity lolly sloshing around for channel firms that can demonstrate value.
"Private equity has so much money it does not know what to do with," he said. "I get two to three phone calls a day from organisations saying ‘can we meet you, we've just raised $1bn'. That does not mean they will chuck money at you – they are very fussy nowadays but are very, very keen.
"There is a common view to call them ‘vulture capitalists'. But the mature private equity guys have good investment managers in there and can help enhancements – Kelway is a classic example."
Some 130 vendors attended DISTREE this year and delegates told CRN the event remains a hotbed for deal making between manufacturers and distributors. One session saw 40 vendors pitch their technology to 200 distributors within a one-minute timeframe, with each scored out of ten.
Northamber executive chairman David Phillips said: "DISTREE is an opportunity to meet vendors you would not otherwise have met. I have found it to be a worthwhile trip. It is different from other shows such as CES – you haven't got the bustling aisles, but you can get down to the nitty gritty, faster."
Warren Hudson, managing director for Europe and Mid East at vendor Native Union, said: "DISTREE is very slick – we have 43 appointments and we will pick up a lot of new business as a result."
Neil Berville, EMEA channel boss at vendor Lenovo, added: "Although DISTREE is in Monaco, you get a good audience from the Middle East and Africa, and east and central Europe – more so than western Europe. So as an EMEA event it is a very effective use of time to be able to meet so many partners and have so many discussions."
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