King of the private equity castle

Arrow's Project Castle purchase of Computerlinks saw private equity firm Equistone make a tidy profit, finds Doug Woodburn

If 2e2's collapse showed what can happen when private equity-backed channel ventures go bad, Computerlinks has provided a shining example of the rich returns on offer to financial backers who pick the right investment.

While 2e2's demise left Duke Street Capital crying into its beer, Computerlinks' private equity backer Equistone was laughing all the way to the bank after more than doubling its money on the distributor.

Last month, Equistone reached a deal to sell Computerlinks to US-based rival Arrow for €240m (£205m), five years after taking the Germany-based firm off the stock market in a €104m deal.

"Project Castle", as Arrow had internally codenamed its pursuit of Computerlinks, marks the latest example of a regional, European VAD selling up to a global competitor, following the sales of SDG to Tech Data and Magirus to Avnet last year. The deal, which is subject to regulatory approval, is set to close in Q4.

During Equistone's investment period, Computerlinks saw revenue swell from €540m in 2008 to about €943m last year, with staff numbers rising from 566 to 720 over the same period.

Equistone said Computerlinks enjoyed "significant" EBITDA growth under its tutelage, although declined to divulge any figures. Ten new offices have been opened in six countries since it seized the reins.

Equistone's Michael Bork stressed that his firm completely retired the acquisition loan during its investment period.

"Today the company is stronger than ever, is a solid business and extremely profitable in its industry," he said. "Computerlinks is an example of the positive influence of the private-equity industry on typical
mid-cap businesses."

Stephan Link, chief executive of Computerlinks, added: "I believe that there are significant opportunities ahead in the IT areas of security, networking, storage and virtualisation, and we look forward to working with Arrow to explore these."

Arrow chief executive Michael Long said the acquisition will bolster the New York-listed distributor's strategy to "serve the datacentre of the future" but gave no indication of how quickly and deeply it plans to integrate the business.

Barrie Desmond (pictured, right), group marketing director at Exclusive Networks - one of the few pan-European VADs left standing - feared Computerlinks may lose its identity if Arrow strips out costs too aggressively.

"It remains to be seen if it will maintain its identity and specialism, or be gobbled up, consumed and lose its autonomy. Only time will tell, but I fear it will be the latter," he said.

Desmond said Computerlinks' sale leaves Exclusive, which is aiming to become a €1bn player by 2017, as "the only game in town" when it comes to offering vendors genuine value-add distribution on a pan-European basis.

He accepted that many of Exclusive's vendors are now post-IPO and require more traditional distribution services such as warehousing, credit and logistics. But he said the VAD would continue to "fill the hopper with exciting new technologies" to which it would dedicate its most cost-intensive resources.

"Our challenge is to not go the same way as our predecessors, such as Computerlinks, who hung on to the coat tails of their vendors and went for volume not value," he said.

"I think there will always be a need for national and pan-European specialists. No matter how often we predict the end of the next great technology wave, there are always new technologies and vendors coming through that need a different model [from the global broadliners]."

Computerlinks is already the UK's dominant security distributor and - with Arrow having acquired UK VAD Sphinx in 2010 - the combined scale of the duo here may well arouse at least a passing interest from anti-trust bods at the European Commission. In the UK, there is also substantial vendor overlap between the duo, with both carrying Check Point, Blue Coat and RSA Security.

However, Pat Dunne, senior EMEA channel director at Blue Coat, was sanguine about the prospect of two of the vendor's three UK distributors combining. Blue Coat has two distributors in most other countries, he added.

"Computerlinks is very specialised in security and we are looking for that to be retained, while Arrow provides access to a broader market and scale," Dunne said. "Both of those things are valuable to us so we are hoping to get the best of both."

Dave Ellis, director of new technologies at Computerlinks, stressed that the two firms would be run as separate companies until the acquisition is closed.

"Until that point, we cannot comment further on specific details. It's business as usual for Computerlinks," he said, adding that the management teams in both Germany and the UK are committed to staying on with the company.

The contrast between 2e2 and Computerlinks' fortunes highlights how private equity firms must pick their channel investments carefully.

Charlie Robinson, investment director at ISIS Equity Partners, a private equity firm that has invested in several UK mid-sized channel firms including Quantix, Onyx and CableCom, said 2e2's collapse has not tarnished his view of the IT services sector.

"It is always going to be an area of opportunity from a private equity perspective because of the size of the market segment," he explained.

A rich man's game: Europe's top distributors succumb to global consolidation

The past 13 months have seen Europe's three largest regional distributors sell up in quick succession, and all to global, US-based competitors. Germany-headquartered datacentre specialist Magirus got the ball rolling in July last year when it sold up to Avnet after concluding it was in danger of being the "last European distributor running against the trend" of consolidation.

Two months later, UK IT group SCH flogged SDG - which included brands ETC, ISI and IQ Sys - to Tech Data, ending its 25-year involvement in the distribution market. Against this backdrop, some commentators saw Computerlinks' sale as inevitable and the security specialist duly obliged two weeks ago when its private equity backers agreed a deal with Arrow.

Magirus
Buyer: Avnet, July 2012
Purchase price: Undisclosed
Turnover: £338m
Staff: 400
Specialism: Datacentre
Key vendors: Cisco, VMware, EMC
Key countries:
Pan-EMEA

SDG
Buyer: Tech Data, September 2012
Purchase price: £220m
Turnover: £1.1bn
Staff: 600
Specialism: infrastructure, PCs, software
Key vendors: IBM, Citrix, VMware
Key countries: UK, France, Netherlands

Computerlinks
Buyer: Arrow, August 2013
Purchase price: £196m
Turnover: £805m
Staff: 720
Specialism:Security
Key vendors: Check Point,
RSA, Blue Coat
Key countries: Pan EMEA