Getting plugged into a good deal

Resellers are increasingly playing Let’s Make A Deal, and not just with customers. They’re wheeling and dealing with each other.

Last month, for example, Toronto’s OAM Group sold its printer services and break-fix operations because they no longer fit with its strategic plan.

Coincidentally, the move came shortly after it rejected another VAR’s feelers to buy the company.

In February, three Accpac Ontario dealers came together under the BAAS Business Solutions banner.

Meanwhile, CDN has learned a Western Canadian firm is quietly snooping around Ontario looking to buy several system integrators so it can dramatically expand its presence in the country’s biggest province.

These moves are another sign that the pace of the Canadian IT industry is picking up.

“Values are probably the strongest they’ve been in the past five years,” says Kevin Tribe, senior partner of Pivotal Decisions, a Markham, Ont. mergers and acquisitions consulting firm that focuses on technology companies.

He quickly added that may not be saying much, considering that the worth of IT companies in general plunged after the dot-com implosion.

“But they’ve come back very strongly, particularly in the last 18 months,” he said.

“Both the values have improved dramatically and actual (number of) transactions has been very strong.

“I don’t know if they’ve peaked yet, but at this point there are good values for both buyers and sellers.”

Now is the right time to be doing deals, says Tribe. Most of the VARs who come to Pivotal looking for a buyer have waited too long.

“When things are going good, when growth is easy to come by and valuations are pretty strong, that’s the time to be looking at selling.”

Count on good times
Unfortunately, he said, too many owners think good times will continue for several more years. When the economy slows, or a few key accounts go elsewhere, or a top salesman goes to a competitor, sales will slump. That will translate into a blemish on a financial record.

So it’s no wonder that with IT sales having been relatively good two years in a row, M & A activity has perked up. Some of it is cyclical – if a competitor is bulking up, you think you have to as well.

But Tribe notes that many deals are forced by otherwise good owners hitting a wall in sales.

“Often we find the existing management team has grown to its level of ability and despite their efforts they don’t seem to be able to break through that glass ceiling,” he says.

Many who come to Tribe just want a change. “They say ‘I’m 54, 56, I’ve been doing this for 15 to 20 years, I’m not ready to retire, but there’s more that I want to do than sit in this chair.’”

That’s the way offers to buy competitors came twice to Voda Computer Systems of Kamloops, B.C. in the last four years, according to company president Andrew Watson.

“In both cases the owners were tired and wanted to get out,” he said.

Never having negotiated an acquisition, it turned into a learning experience for Watson and his partner.

“It was a lot of fun,” he says now of learning how to read a balance sheet and negotiate.

The second company, one of the oldest VARs in the city, approached Voda – a young upstart – a mere seven months later and turned it into a spectacular success thanks in part to an advertising campaign Watson invested announcing the deal.

But he admits that on both deals he and his partner relied on their gut instincts. Today, with a comptroller on staff, they’re more circumspect. They have their eye on an acquisition, but are taking their time quietly checking out the firm before making an approach.

Focus on services
At the OAM Group, the sale of part of the business stemmed from the company’s increasing focus on high-end services, said Marc Wayne, one of OAM’s managing partners.

That’s what led to its first acquisition, in 2004, of a VAR which specialized in Microsoft services.

On the other hand, it has turned down offers from two publicly-traded companies that wanted to acquire OAM, most recently because it found little synergy with the prospective buyer.

Wayne does emphasize the importance of being decisive on whether a deal is worth pursuing

“I do not want mergers and acquisitions to take our eye off the ball on our growth,” he says. “If things can’t come together pretty quickly you don’t want to spend time trying to put a round peg in a square hole.”

What everyone wants to know is the selling price, which Tribe says can be tricky to negotiate. In addition to looking at the last three years of sales and how broadly (or narrowly) are revenue sources, buyers will consider the state of inventory, exclusive product lines or partnerships, relations with key customers, if the company to be acquired is in a soon-to-be hot market and the strength of management.

Have a vision
“If you have a strong vision and business plan and are executing well against it, that’s better than someone who’s winging it,” he says.

If there are problems – unhappy ex-shareholders, employees or customers – deal with them. More than once has Tribe seen a deal scuttled by a last-minute lawsuit.

Then there’s the structure of the deal itself, which ranges from a swap of shares to a pay-out over several years based on the merged company’s performance.

Be patient: in Tribe’s experience, an offer crosses the table five times. Then lawyers and accountants have to do due diligence.

Finally, Wayne cautions that a deal has to make sense. “It’s not the amount of money you can achieve in a transaction, but the amount of value you can create for your company moving forward.”

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Jim Love, Chief Content Officer, IT World Canada

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Howard Solomon
Howard Solomon
Currently a freelance writer, I'm the former editor of ITWorldCanada.com and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including ITBusiness.ca and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times. I can be reached at hsolomon [@] soloreporter.com

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