Computerlinks brushes off rumours of Arrow interest

Pan-global VAD dismisses sale talk as 'rumours in the market'

Pan-global security VAD Computerlinks has distanced itself from rumours that it is up for sale and in talks with US-based distribution giant Arrow.

According to market chatter, Computerlinks' private equity backer Equistone is looking to cash in as the five-year anniversary since it took the Germany-based VAD private in August 2008 looms.

Arrow has been pinpointed as a potential suitor by multiple sources.

A Computerlinks representative said he was aware of the rumours but told us "there's not really a story here".

"There are rumours in the market all the time," they added.

Meanwhile, an Arrow representative trotted out the usual line that "it is our practice to not speculate or speak to rumours".

Since Equistone – formerly Barclays Private Equity – took the firm off the Frankfurt Stock Exchange in a €104m (£88.5m) deal nearly five years ago, Computerlinks' revenue has grown by nearly 75 per cent, hitting $1.25bn in the 12 months to 31 December 2012.

Germany and the UK remain its largest territories but it now operates in 25 countries, employing about 700 staff.

Although last November Computerlinks told us there was "no real drive for an exit strategy at the moment", with profits rising and private-equity investment cycles often lasting five years, now would be a natural time for Equistone to look for a return on its investment, sources remarked.

In 2010, Computerlinks set out ambitious plans to more than double its EBITDA margin to 10 per cent by investing more in new technologies outside its IT security stronghold and building a services portfolio. The distributor claims EBITDA before one-off payments grew 23 per cent last year, although declined to give a raw figure.

The CRN view

But while the logic for Computerlinks may be clear, would a deal make sense for Arrow?

The first thing to note is that Arrow already has a substantial European security business, not least in the UK thanks to its 2010 acquisition of Sphinx. But even though Arrow already offers a lot of what Computerlinks provides – the duo shares franchisees with the likes of Check Point, Blue Coat and RSA – Computerlinks is still much stronger in the security space. Sphinx did not operate outside the UK, meaning any deal would also give Arrow instant coverage of the mainland European security market.

And the fact there is significant duplication may not be such a bad thing as it could enable Arrow to dump lots of costs out of the business, particularly around Check Point, a vendor known to demand substantial investment in back-end systems from its distributors. Whether such duplication would attract the scrutiny of the European Commission is a potential issue, however.

While Arrow may be in cost-cutting mode – it announced last month it plans to shave another $35m (£22.5m) off its annual expense bill – it remains one of the only distributors with the financial clout to swallow someone as large as Computerlinks. If Equistone is looking for a trade sale, Arrow, perhaps alongside Avnet, would be the obvious option.

Besides possible anti-trust issues, another stumbling block could be the price: sources reckon Computerlinks could be asking for at least six times earnings.

It is unlikely its EBITDA margin is as high as 10 per cent, but even if it were five per cent, we would be talking about a price of $372m based on last year's sales.

Computerlinks has lots of juicy annuity streams, and a big Check Point renewal business, meaning it won't come cheap.

But even though Arrow may be under some pressure to keep costs under control, it must continue to acquire revenue to ensure its profits keep pace with the insatiable demands of investors. If it can get Computerlinks – a relatively high-margin business for distribution – for a good price, all in all the deal would suit them.