February 5, 2016
By Steven Burke, published in CRN (www.crn.com)
Private equity participation in channel mergers and acquisitions in 2015 accounted for approximately 66 percent of the revenue of the 21 North American transactions identified by Martinwolf M&A Advisors, a global IT investment firm.
Of the 21 North American transactions identified by Walnut Creek, Calif. based Martinwolf in 2015, 11 of them featured private equity buyers.
“Today, the dominant players in the market for VARs are not other IT solution providers, but instead private equity firms,” said Marty Wolf, founder and president of Martinwolf in an interview with CRN.
“What’s more, the number of these transactions is increasing. As private equity firms add IT solution providers to their portfolios, one of their first steps is often to use their initial investment as a platform for further expansion into the space.”
The significant private equity cash infusion backed up by “proven executives and operating capital” is helping solution providers transform into higher-margin, services-rich businesses, said Wolf.
“Thanks to their broad presence, they are also able to bring a fresh perspective that is unburdened by ‘channel thought,'” said Wolf, whose company has done more transactions over the last two decades involving CRN SP500 companies than any other investment adviser. “Rather than worrying about maintaining vendor relationships, always a key priority for VARs, and doing things the way they have always been done, investors prioritize customer relationships and investment returns,” said Wolf. “It’s pinpoint decisions, not blanket investing — and the result is essentially zero-based budgeting, on an investment scale.”
Another trend in 2015 was the increasing number of “hand-offs” made as one private equity company closes out its investment by selling its stake to another private equity firm.
One example of this type of transaction from 2015 is the sale of Platinum Equity portfolio company Pomeroy ( No. 44 on the CRN SP500 list with revenue of approximately $630 million) to Clearlake Capital platform Tolt Solutions, said Wolf. Another is Thoma Bravo portfolio Sirius Computer Solutions sale to Kelso & Company, he said.
“This is a practiced model,” said Wolf, noting that private equity player Platinum acquired CompuCom Systems in 2004 for just $254 million and sold it to Court Square Capital Partners for $628 million just three years later.
The private equity hand-offs are supplanting the public markets with IPOs languishing, said Wolf. “It’s a strategy in part of risk management, as firms seek to capture definite value rather than risk a disappointing showing on the public market,” he said. “The result has been pronounced — as M&A breaks new records, IPOs languish with dollar volumes in 2015 down 63 percent year over year to $36 billion.”
The private equity participation is also reshaping the IT vendor landscape, said Wolf, pointing to the dynamic impact that private equity powerhouse Silver Lake has had investing just this week in Symantec and combining with Dell founder and CEO Michael Dell in the largest leveraged buyout in IT history in 2013.
“Silver Lake has accelerated Dell’s transformation strategy, doubling down with the EMC acquisition in a deal that aggressively transforms Dell into more of a cloud company in a way that it would never have been able to without private equity backing,” he said.
With the Federal Reserve beginning to raise interest rates and capital more difficult to come by, Wolf said he expects to see private equity firms once again be a “dominant force” in IT M&A in 2016.
“Between their capital, their experience and their unique customer-focused mindset, they continue to bring key advantages in any M&A transaction,” he said.