Get away with merger

Resellers can be in for a rough ride when their partners dive into the M&A pool, or if they dip a toe themselves. But it needn't be a disaster if they do it right

Unless you're a Computacenter or a Morse, it must sometimes feel like you are barely on the radar of your vendor and distributor partners. At best, you are a cog in a large and unfeeling machine.

So when it comes to these suppliers acquiring each other or merging, is it any wonder blameless resellers can end up tossed around on the resulting sea of uncertainty like corks, their interests somewhat secondary in the heat of the moment?

Pity the reseller in particular that has just jumped through hoops to secure a valued accreditation, only to find themselves squeezed out as two channels are shoe-horned into one.

So is it possible for resellers to prove themselves against often wholly unexpected and unwanted merger and acquisition (M&A) activity among suppliers?

Taking care about who you do business with in the first place is a good start, according to David Ellis, director of e-security at distributor Unipalm.

"Vendor mergers can have a bit of a negative impact on resellers as well as distributors," he says. "You need, when looking for vendors to partner with, to do so with the right kind of due diligence. You need to speak to someone senior so they can tell you where they see the company heading.

"You need to consider whether they are in a market currently experiencing consolidation. And to ask how they are being funded. Are they backed by a VC [venture capitalist] with a track record of selling rather than floating?"

Ellis sympathises entirely with resellers that go through a lengthy certification process, only to end up with an obsolete qualification. But he says it does not always work out that way. "Sometimes an acquiring vendor will honour that certification," he says.

Either way, Ellis believes that resellers should expect a lot of M&A activity over the next year or so.

"There are a lot of smaller companies, especially in security, where we are, which want to expand but are too small for an IPO [initial public offering]. They see M&A activity as a way to get into new markets and expand their geographical reach, and also a good way to bring new skills on board," he says.

Ken Charman, director for EMEA at instant messaging security vendor FaceTime, takes a darker view of the impact of consolidation on resellers. "Fewer vendors on the market means resellers have less choice and fewer opportunities to negotiate a good deal," he says.

Charman also believes that time spent analysing potential partner prospects, as a stab at prevention over cure, is time wasted.

"Forget it. You choose suppliers on the strength of the product offering and marketing support. There is no point wasting time fortune-telling on M&A. If you can do that, go and get a job in the City," he says.

Bob Jones, managing director of web security vendor Equiinet, agrees that vendor M&As often mean turbulent times for resellers. But he believes resellers that are made of the right stuff have nothing to fear.

"Of course there's going to be an impact on the channel when vendors merge," Jones says. "But the best resellers always survive and thrive. If you're a vendor acquiring another vendor, their channel is part of the value you're getting. It's the pull for their product.

"At the time of the acquisition, nobody wants too much of a hit on the profit and loss or balance sheet, so it's important to maintain flow of revenue, which means hanging onto the successful resellers."

Gordon Loader, Avaya's director of converged voice applications, also believes there can be a silver lining in the M&A cloud. "Take-over and merger activities are quite often reactions to changes in market dynamics, especially around technologies and customer requirements," he says.

"As such, they can benefit the reseller, as the combined vendor/distributor offering will reflect a very competitive package in the marketplace."

Loader argues that some M&A is designed to bring about cost reduction between the combined operations. Ideally, he says, this should result in a more competitive pricing model from vendor to distributor to reseller.

Nor does he believe that resellers have too much to fear from time and money wasted on redundant certification. "Company combinations rarely bring about immediate changes in product sets and accreditations," he says.

"For this reason you should expect accreditations to remain in force and change in the timescales that vendors normally change their accreditation structures."

And yes, it is important to try to assess a potential partner's prospects, he adds. "With the range of technologies on offer today, the focus has to be around business benefit delivered to the customer.

"Real prospects today should be judged around the ability to deliver value to customers by solving their business problems, rather than the availability of whizzy technology," Loader says.

With M&A activity among big industry players at a relatively low level over the past few years, thanks largely to the general economic slowdown, a growing phenomenon has been a rise in resellers looking to partner with each other.

Resellers need to be alert to the pitfalls of the M&A game before embarking on a potentially irreversible process, according to Ellis.

"Resellers should be aware of the whole merger game and the risks it carries. Integration of staff, systems and culture can be a problem. A good fit on paper can be hard in reality. And always remember that keeping good people is key," he says.

Jones acknowledges that there is indeed a spate of resellers merging, mainly, he believes, because IT businesses are relatively cheap at the moment. "Merging or acquiring is a good way of expanding safely," he says.

But he has watchwords of his own: "There are always experts available to make sure you don't slip up. But fees to lawyers and accountants can easily spin out of control. Whatever you do, just pay them for their advice and don't delegate the negotiations," he says.

Charman adds that consolidation in their channel is generally very much encouraged by vendors.

"They want to reduce the number of accounts they deal with," he says. "Each one creates additional overhead. Vendors can escape this cost by using a distie, but then they lose contact and control.

"They want to deal with a small number of large resellers that have direct contact with customers. US vendors are looking for resellers with a pan-European reach. This is also pressuring local market players to form alliances and consolidate."

From the reseller perspective, Charman adds, acquisitions tend to strengthen the business engine.

"They can put more volume through shared service departments such as marketing, engineering, product management. They can reduce sales cost by reaching more customers through a rationalised sales operation. It increases purchasing power with disties and vendors.

"Finally it allows resellers to be big enough to go direct to the vendor," he says.

But there are down sides to be borne in mind as well, Charman warns.

"As the organisation gets bigger it loses its drive and dynamism. Big is beautiful but fat is ugly.

"That lean, mean sales machine bloats up with non-revenue-generating wasters such as human resources, health and safety, middle management, business mentors, internal training, telephone hygienists, internal development, professional services and, the last straw, an accountant as chief executive.

"The winner will always be the sales-driven entrepreneur who knows how to run his own business," he says.

Loader believes the drivers bringing resellers together can be as much technical as business-related. "We are going through a period of discontinuous innovation and a new technology model is emerging around IP-based communications," he claims.

"This means that knowledge needs to be added, new skills brought on board and so on. A company wishing to evolve into the new market space has a choice of how to do that: organically or by acquisition.

"Acquisition has the benefit of speed but the challenge of cultural integration. Organic growth of talent can be slow, so market opportunities may be missed."

The telephony sector that is Avaya's stock in trade is going through an interesting parallel rise in M&A activity, with some interestingly comparable results. Certainly the mega-deal merger seems to be back in vogue in the telecommunications market, and causing the same sort of channel uncertainty there as it is in IT.

There is KPN's recent failed multibillion bid for O2, and France Telecom's continued interest in the UK's top-tier players, not to mention various other possible deals that get discussed whenever two telecoms professionals meet.

Chris Evans, managing director of ISP and telecoms service provider hSo, says that whatever the market, the rationale for following the M&A trail is much the same.

"Are we growing as quickly as we can, organically? Can we accelerate cashflow or increase profitability rapidly?

"Let's exploit the synergies of our potential new M&A partners, open up a whole new potential customer base, cross- and up-sell products and services while reaping the benefits of streamlining and mutual cost savings at the same time," he says.

But Evans argues that such considerations should not just be the preserve of multibillion-dollar global leaders. Because the big telecoms players and their merger plans come with a major and highly controversial regulatory issue, Evans sees the next wave of M&A activity happening at a much lower tier of the industry.

"There is a school of thought that the real opportunities to be had in the telco sector now lie with the smaller or niche players," he says.

"Further down the food chain, there are literally hundreds of sub-£10m telcos in the UK. However, it's in the £4m to £10m area where the really interesting developments are likely to emerge.

"Here, although we probably still have about 50 players, there is very much a clutch of no more than half a dozen that have the essential ingredients for a successful foray into the M&A cauldron."

Many companies at this level are resellers, he says, but not just resellers of voice, wholesale bandwidth or wireless. They are providers of added-value services to enterprise customers too. "All are companies led by driven, successful individuals with a track record of delivering," he says.

If you are a reseller looking to merge, acquire or be acquired, then timing is everything. There are a number of hoops you will need to jump through if you are to get through such a step. But if you are ready to go, you might well find that the market is not.

It can be draining on the managers of a business to be on permanent standby for the right acquisition opportunity. It can lead to a loss of focus on actually managing the business, and leave employees unclear about what is happening next.

It also goes without saying that if you are looking to buy, you want to be sure that the market is bottomed out, and the value of your target is at its lowest. But if you want to be bought or merge, you will be hoping to surf on the crest of a booming market.

But trying to predict whether the IT market has bottomed and poised to bounce back or whether it is stuck in a rut is a tricky business.

At the beginning of 2004, many professional business advisers were predicting a strong recovery as the year progressed. Consequently, many business managers readied themselves for M&A action, only to find that talk of recovery was premature.

Those same advisors are now looking forward to genuine recovery in 2005. But they have been wrong before.

As the manager of a technology business you are best advised to be warned about the fallibility of so-called M&A experts while focusing most of your efforts on what you do best: selling technology.

CONTACTS

Avaya (0800) 698 3619
www.avaya.co.uk

Equiinet (01793) 603 700
www.equiinet.com

FaceTime (001) 650 574 1600
www.facetime.com

hSo (020) 7847 4599
www.hso.uk.com

Unipalm (01638) 569 600
www.unipalm.co.uk