After a slow 2009 and 2010, a wave of merger and acquisition activity is sweeping the IT services channel. Drivers include margin pressures caused by the managed services model and big-bang mergers among high-tech vendors. The net effect for IT solution provider management teams is that they should reassess their business value propositions carefully as the industry moves into the second half of 2011.
“It is definitely more active,” said Arlin Sorenson, CEO of Heartland Technology Solutions, a Harlon, Iowa-based solution provider that has handled myriad acquisitions in its 25 years. One of its latest deals was the acquisition of Computers, Networks, Solutions Inc. of St. Joseph, Mo., in October 2010. That acquisition gave Heartland Technology its seventh location in the Midwest.
In May of this year alone, there were at least two significant transactions in the channel. Managed service provider (MSP) All Covered picked up Techcare LLC, a Chicago-based MSP. All Covered has said it is planning something like 50 mergers and acquisitions over the next three years. Even distributors are getting into the act: Arrow Electronics Inc. purchased Cross Telecom, a top Avaya partner, in its second such deal in the past year.
“This is the busiest I’ve ever been,” said Martin Wolf, founder and president of Martin Wolf Securities and chairman of MergerTech. Wolf’s M&A advisory firms focus on mergers and acquisitions among IT solutions, services and supply chain organizations of varying sizes.
Deal volumes – and sizes – are up dramatically from a low in 2009, Wolf reported. The number of transactions less than $100 million throughout the IT services and supply chain were up 24%, for example.
Greg Baker, CFO for the North America operations of IT solution provider Logicalis, said he has also seen a sharp rise in mergers and acquisitions this year. In fact, the amount of opportunities presented to Logicalis doubled in the last 12 months, he said. In the fourth quarter of last year, Logicalis bought Network Infrastructure Corp., a Cisco Gold partner based in Phoenix. The main motivation behind that deal was an opportunity for the two companies to cross-sell services and product sets.
“The last two or three years were really spent getting houses in order,” Baker said. “Businesses hunkered down. They optimized their organizational structures. We are now starting to enjoy better stock market valuations. All this fuels the appetite to invest in acquisitions. Those are some of the reasons why deal volume is picking up.”
Another significant factor is the specter of margin compression, which has taken on more weight as many IT solution providers transfer at least a portion of their annual revenue into the managed services model.
The rise of that business model takes its toll on IT solution providers that didn’t have a proper handle on their operational efficiencies, Wolf said. The rise of cloud computing services is also prompting soul searching among IT services firms that may already have weathered two or three previous business model transitions, he said.
Vendor mergers beget channel mergers
An additional big factor has been mergers among high-tech vendors. Wolf reports that between March 2008 and March 2011, IBM acquired 32 companies, Oracle bought 26 and Hewlett-Packard bought 23. Those acquisitions forced channel consolidation as the acquiring companies changed business partner policies.
In early May, for example, a desire to consolidate Novell skill sets prompted Novacoast to buy another Novell solution provider, Data Technique Inc., which has developed an innovative cloud identity management service.
In a statement announcing the merger, Novell Inc. vice president of partner marketing Scott Lewis, said: “Novacoast’s acquisition of Data Technique Inc. is a significant channel development for Novell customers. This merger combines the reach and service levels of two strong Novell Partners for our shared customers. Both companies have services capabilities that combine with Novell and other products to meet customers’ needs for Intelligent Workload Management from physical to virtual to cloud computing environments.”
About the expert
Heather Clancy is an award-winning business journalist in the New York area with more than 20 years experience. Her articles have appeared in Entrepreneur, Fortune Small Business, the International Herald Tribune and The New York Times. Clancy was previously editor at Computer Reseller News, a B2B trade publication covering news and trends about the high-tech channel.