Are we in a golden period of distributor evaluations?
Ingram Micro was sold last week for a cool $7.2bn, after Tech Data was snapped up by Apollo earlier this year for over $5bn. CRN asks channel figures whether we are entering an era of high-price M&A deals and what it says about the health of the sector
Ingram Micro was sold last week for a whopping $7.2bn to private equity (PE) firm Platinum Equity. Rumours emerged in August that Ingram's owner China-based HNA Technologies was in talks with the PE house about a potential deal.
HNA had been shopping Ingram around for the last couple of years as it struggled to reduce the $40bn debt it had accrued over a series of acquisitions in recent years. It had even reportedly been engaged in talks about a $7.5bn sale to Apollo Global Management, which eventually bought rival Tech Data for a cool $5.4bn earlier this year.
Do these mammoth acquisitions herald a new era of high prices for distributor deals or are they the outliers that can command such prices?
"There'll be eyebrows raised across the world and people who will look at distribution in a whole new light," said Alex Tatham, MD of UK distie Westcoast.
"Clearly Platinum saw great value in bits of Ingram that may be worth considerably more in the future - they have a great number of logistics and they've got a fantastic cloud business.
"I think it shows that distribution is always evolving and that it's worth more and more these days. If anything, COVID has shown that vendors have put an increasing amount of faith in that two-tier model, and we've shown that we can execute through all that has happened."
Dave Stevinson, boss of QBS - which itself has been undergoing an acquisition spree in recent years - agreed that deals of this size are a good indicator of the health of the distribution sector and also the wider channel, though he expressed wariness at the headline figure.
"This is a headline price; there are lots of details we don't see in that, and there's no guarantee it's going ahead," he stated.
"But from what's been publicly announced, it looks like a really good valuation for a really good company by a really good buyer."
Remaining relevant in a cloud world
Many have questioned the relevance of distribution amid surging uptake of cloud, but it has consistently proven its value to the channel, particularly in its reaction to the challenges to the pandemic, according to Paul Cubbage, MD of Target Components.
"People have been writing off distribution for donkeys' years," he declared.
"It's a bit like predicting the death of the computer. People have been banging on about it for years and we are, of course, a million miles from that. I can only speak from my experience, but we had a record year this year, hitting £40m for the first time in a rolling 12-month period. Last year was also a record year, for us, as was the year before that. A lot of that has been in reaction to things we've done internally, but you've got to have the demand out there in the first place for that kind of growth."
Westcoast's Tatham also rebuffed any argument around distribution's role in the channel, stating that the sector is one of the main drivers of the cloud trend.
"It's distribution that is driving the cloud business across the world at the moment - we are extraordinarily relevant," he added,
"Cloud is one of the fastest-growing areas of Westcoast's business. It is a fantastic ability to be able to explain and do complex transactions through a two-tier channel. That's how distribution adds value and that's why we're so good. "
Popular with PE
PE houses have had a voracious appetite in recent years for channel businesses, though they have primarily been focused on vendors and resellers. This year, however, the trend seems to have shifted in distribution's favour.
It's not just broadliners like Ingram Micro and Tech Data that have been making headlines: Scansource sold off its European hardware business for $30m last month to US PE house Ten Oaks after a 15-month search for a buyer.
"There's definitely a herd mentality when it comes to private equity houses," said Stevinson.
"Platinum Equity has done the biggest-ever deal for an IT distributor, eclipsing Apollo's deal for Tech Data and putting the PE community sitting firmly at the top table for IT distribution."
Cubbage added that private equity looks for low risk, high-margin businesses to add to their portfolios, and distribution is a perfect fit for that profile.
"They're looking at businesses that are going to generate a return in the future, businesses that are strong but relatively low risk and with a decent return and distribution can do that well," he explained.
Tatham agreed with these sentiments, adding that private equity sees technology as a solid mid-to-long-term investment.
"Technology is going to continue to explode across the world over the next 30 years, so it's not like they're investing in a business that hasn't got the opportunity to continue its growth," he said.
With such gargantuan deals for both Tech Data and Ingram Micro - some of the biggest deals ever made in the channel - does this mean that we should expect more high prices for other distie deals going forward?
Stevinson believes that these acquisitions are evidence that the market is finally seeing the value that distribution brings to the channel.
"There are so few distributors in relation to resellers," he elaborated.
"Distribution is now being recognised - alongside resellers - by the public markets and the very large private equity houses."
Tatham added that valuations will only continue to go up because of distribution's flexibility to adapt to changing technologies, as well as navigate economic challenges such as Brexit and the pandemic.
"It creates enormous value for really low cost and has the ability to be able to deliver the technology that the world needs and is going to need more of," he emphasised.
"Distribution has always been of great value, and an underestimated amount of value - and it's still underestimated; who knows what those valuations will look like in five years' time? The new owners of Ingram Micro may have got themselves a bargain."