Ireland not acquiring a taste for mergers

Ever since the credit crunch of 2008 there has been a feeling abroad that the Irish channel would be on the receiving end of significant consolidation. Some observers have forecast just such a scenario but, for the most part, their predictions have been unfounded.

Given this background, it’s no shock to find that over the last few months whenever Irish Computer has asked representatives from resellers, distributors and vendors about consolidation, their response has typically been surprise at just how little there has been. Why? There’s the $64,000 (€48,190) question.

Global fallout
For a small country Ireland has a large number geographically diverse resellers (over 1,000), a large number of them owner/manager businesses. The small ones are probably smaller than they were before everything went horribly wrong with the Irish and global economy. Certainly, Paul Marnane, general manager at Commtech, believes so, saying he has seen many SMB resellers cutting staff down to a core around the owner/manager to keep trading rather than close up or consolidate.

He argues a big stumbling block to any potential purchaser is the "unrealistic valuations" attached to businesses by owner/managers. "They’re looking for too much money," he says. In addition, most calculate that they would earn more in annual income by keeping their company than they would in a one-off payment to be bought out of it. "If they sell up, they may have a non-compete clause attached [to the deal], so what else can they do?" Marnane asks. And if they stayed, would they be happy to work for somebody else?

Neil Mullaney, managing director at Comsys, agrees that company are not matching owners’ expectations. "A lot of company owner/directors are of the view they are better off waiting for the economy to return to reasonable growth when valuations are likely to be significantly higher than they are today," he says. There’s also the emotional attachment they have to their companies. "There is a huge amount of emotional involvement with many channel companies," he observes, "which can make it much harder to step away."

Michael Conway, director at Renaissance, says that, if anything, there’s a "contrary to consolidation" phase taking place in a fragmented market. There are only a small number of medium and large sized resellers in the market but the trend to cut staff numbers can actually result in more small resellers emerging.

For example, if an organisation with 50 people cuts down to 10 or so, it could lead to the setting up of as many as 25 companies by ex-staff. It’s a point echoed by Marnane who says that former staff who set up channel businesses and run them from home have such a low cost base that they can survive on a very low level of income for a considerable amount of time.

Another difficulty is that many of the smaller resellers sell to the small business sector and that area is struggling at the moment. This makes it hard for those resellers to expand. They can’t make the move into the mid-market because they just don’t have the wherewithal to do it given the constraints they are operating under in the SMB market.

Conway at Renaissance says it is very difficult for small resellers "to move up a step". They could be very busy but they’re probably not making any money. And if they’re struggling to make money, they’re unlikely to employ anybody else to bring in additional skills and expertise to help make the move up.

Marnane agrees: "They might just have on generalist that knows a little bit about everything but they’re not really strong in anything," he says. Needless to say, that’s not going to make them any more attractive to a potential acquirer.

Neil Wisdom, managing director at Complete Telecom, admits to being surprised at the low level of consolidation, confessing that he expected more high profile failures or closures at a time when markets are getting tight. "I was expecting to hear of more closures," he says.

For a company like Complete Telecom, for example, an acquisition would make sense to help grow the business either by increasing the customer base or filling a gap in its product or services portfolio. That’s not as easy to find as it sounds.

Consolidation in disguise
One interesting by-product of the current economic situation has been what Marnane describes as "consolidation in disguise" where SMB resellers work together to fill in the gaps in each other’s portfolios. Typically, the principals of these businesses may have worked together in a larger company in the past. As a result, they can be more open to working together on projects.

"There’s an awful lot of that going on all across the country," Marnane reveals, with small resellers working very closely with each other. It makes sense, he says, because they can run their own business to focus on their area of expertise but extend their resource by partnering with others.

Wisdom is slightly more cynical about the trend towards collaboration. He recalls that when things went really bad in 2008/2009, "I found more people in more companies having meetings trying to sell their capabilities to other companies, as opposed to the end customer. There was a remarkable amount of phone calls and meetings," he says, adding this may well have had something to do with the fact there was so little end customer activity at the time.

Complete Telecom also looked at forging new partnerships and relationships with other companies to take its services or products "but it didn’t really generate much business". Partnerships are great, but unless the arrangement is trustworthy, "they can get difficult". His observation is that as things got better, these types of collaboration "fell apart quite quickly because people wanted to retain their customers".

So what are the odds on further consolidation in the Irish channel? Not very high, according to Mullaney. "I think that the constraints around finance, low market values and the reasoning that they are better off keeping the business will keep most smaller channel companies from seeking out mergers or acquisition," he says. "The only likely consolidation would be a much larger player buying a small niche provider, where the investment isn’t a big financial stretch for them and there is very little difficultly with regard to having the time or skills to manage the merging process."

Would it be a good thing if there was more consolidation? Marnane is unequivocal. "Consolidation would be better for the channel," he states. At present there are as many as 1,200 resellers in Ireland. Consolidation would result in economies of scale for businesses with bigger reach, more geographic coverage and a wider range of focus. In turn, this would make them more attractive as potential partners to larger vendors.

From a financial point of view, they would have better capital and access to credit to finance large deals. And with less partners overall, the Irish channel would have more financially sound partners. "It would make partners more profitable and more likely to survive and grow in the long term," he argues.

Already there
Paul Kelly, country manager at COMPUTERLINKS, says consolidation in Ireland has already occurred. He argues that local distributors with a global presence, such as COMPUTERLINKS, are "vital to maintain the supply of ICT products and services" to resellers and their customers and claims those that operate solely in the Irish market could "struggle to provide the same breadth of solutions and services across different technology areas".

Not so believes Lester Horsfall, commercial director at Memory Bank, who argues that consolidation of the distribution channel would make things harder for resellers by removing credit facilities, product choice and technical expertise for tier 2 products.

"Vendors and resellers alike require a varied mix of distributors available in a market to facilitate choice," he claims. "Distributor choice is important for the ongoing health of every link in the chain in the Irish IT channel."

More consolidation
One company that has been very active on the acquisition front in recent years is the PFH Group. The company bought Redstone Technology from its UK parent in 2010 for EUR*2.5 million in cash and snapped up the Irish arm of Siemens Enterprise Communications in May of that year.

Managing director Declan Van Esbeck says there should have been more consolidation over the past few years given that valuation multiples are a fraction of those in 2006 and 2007. But there are reasons why not much has happened, he argues.

"Owners don’t want to sell out at rock bottom prices when the general feeling is that valuations will improve as the economy picks up," he says.

Despite the expectation of consolidation and the number of acquisitions over the years, Van Esbeck argues not much has really changed. "There were four of five major resellers 10 years ago and although some of the names have changed, the number of highly capable players remains about the same."

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