Channel consolidation inflates pricing levels
Analyst urges acquisitive firms not to pay over the odds
There is still more consolidation to come in the channel, but firms should ensure they do not pay too much for their acquisitions.
According to a report by analyst Plimsoll Publishing, UK Computer Equipment Distributors and Dealers 2005, there are 105 firms in the channel with the financial resources to capitalise on their earnings by buying a competitor.
"If one of these cash-rich companies has money to burn, it could put it to good use by acquiring a rival," said David Pattison, senior analyst at Plimsoll.
"However, supply and demand means acquisition prices could rise above what one should pay to what one has to pay."
The analyst would not reveal the companies involved, but the report did identify 55 companies that could be acquired due to signs of financial stress, low pre-tax margins and high debt levels.
Pattison said that in such companies the average level of debt was four per cent of sales.
"This shouldn't be looked at negatively. Selling your business could be the best thing for it," said Pattison. "By clearing the debts of a struggling firm, a cash-rich company could become the owner of a profitable business."
Comms reseller Chess completed seven acquisitions last year, including telecoms provider OCIS Lite in November. It told CRN at the time that it plans to make about the same number again this year.
David Pollock, chief executive of Chess, said: "The channel is going to see a serious amount of consolidation next year [2005]. The smaller guys are going to be squeezed out of the market."