Kelway and Trustmarque deal maker talks channel M&A

It's been a frenetic period for M&A in the channel. CRN caught up with Raphael Grunschlag, head of European technology at William Blair - which advised on the sale of both Kelway and Trustmarque - to discuss what is driving this level of activity and whether it is sustainable

Several of the UK's top VARs have changed hands in recent months. What is underpinning that level of interest and how would you characterise M&A levels right now?

It's robust. Kelway and Trustmarque were acquired by large, strategic buyers but we've seen a fair amount of private-equity interest in these companies too and have also seen the successful IPO of Softcat. From a private equity perspective it is driven by a view that, because of the cloud, service providers will play an important role. There's a headwind [with cloud] in the sense that less on-premise equipment will be bought, but there's also a tailwind of needing someone to manage that shift to cloud. From a financial perspective, with that shift tends to come more recurring revenue and managed services, and those revenue streams are valued by private equity funds in particular and that has underpinned the level of interest we've seen.

What has happened to valuations over the past 12 months and what sort of multiples are resellers commanding right now?

There was a lot of volatility globally at the beginning of the year and there has been more volatility here because of the Brexit concerns of late. But each of the multiples you see is an outcome of a specific level of synergy or discussion or fit, so it's difficult to say. The further you are down the gross margin spectrum - the more of a pure reseller you are - the more you're in a six to eight times EBITDA zone. And the more you're in a service provider, consulting, SI, managed services model, the more you're moving up into the 10, 11, 12 times EBITDA category. There's a spectrum that correlates to margin and growth.

Does the recent wave of consolidation mean there is now a lack of targets for private equity and trade buyers?

There aren't that many large ones left but there are specialists and I think that's where there will continue to be M&A. People are buying specialist skills and Trustmarque was a specialist in the public sector and Microsoft. There are specialists in security, in different cloud technologies and SaaS, and across the IT services spectrum. We will probably see interest in the guys that don't have scale but have got the specialisation, and that will drive value.

What is your top tip for resellers with an eye on an exit strategy?

I continue to believe that the businesses we've been associated with have had strong independent paths and that is one of the best things you can do as you consider an exit. It gives you the ability to say no and gives you the ultimate negotiating leverage to say 'look, I've got plenty of capital to invest in my business'.

How do the dynamics of the M&A market in the UK differ from continental Europe right now?

As a general rule, our European business is very active. What's interesting is that the Trustmarque deal happened two days before the EU referendum - a UK buyer and a UK target. [The industry] may be a little insulated from the outside world but I'd say we are seeing strong volumes across our European business across the board; probably stronger than the UK right now given what's gone on.

You advised Trustmarque on its £57m sale to Capita. What do you feel are Capita's intentions for the Trustmarque business and what was the rationale for the deal?

I think they were attracted to its growth profile and the ability to grow the business and apply its capabilities to customers inside Capita. The approach is very much a growth approach and Trustmarque is a growth engine for Capita. It's a great deal and a great result for Trustmarque and Capita, and hopefully there will be more opportunities for your readers who are building great businesses and want to realise value for them.