What ultimately sunk NexInnovations was margin pressure.
Margin pressure was one of the reasons why NexInnovations entered Companies’ Creditors Arrangement Act (CCAA) in August of 2006.
Dave MacDonald, the president and CEO of Softchoice, which acquired nearly all of NexInnovations assets for $10 million, sited margin pressure as the main reason why the Mississauga, Ont.-based solution provider fell into financial difficulties.
MacDonald also learned that NexInnovations’ president and CEO Hubert Kelly went into CCAA protection for the second time with the intension of winding up the business.
He added that NexInnovations’ business model came with higher costs for the margin they were earning.
“Their model was too expensive. They were suffering from margin pressure. Their costs were too high for the margin they were getting and some of the customers were leaving because of the pressure they were under,” he said.
MacDonald added that Softchoice has a low cost infrastructure. “We have to maintain that and we have a power system that gets highly replicated services, which makes us lower in Canada except for CDW. That is the key and you have to make sure you raise the bar on productivity to drive the bottom line,” he said.
This strategy was also one of the reasons why Softchoice did not acquire the break/fix portion of NexInnovations assets.
The entire team at Softchoice worked around the clock over this past weekend calling customers and integrating employees. MacDonald said that initial customer feedback was that they were glad Softchoice took responsibility for NexInnovations.
MacDonald expects between 150 to 200 former NexInnovations employees to join the fold. Softchoice will be maintaining NexInnovations Mississauga-headquarters so as to not inconvenience employees.
MacDonald said that he heard of NexInnovations troubles on Oct. 2. He called the receiver Rob Holmes of the Toronto firm Prowis the next day and a deal was done on Friday.
Based on the trailing 12-month gross revenue of approximately $200 million attributable to this business, Softchoice estimates that this transaction will be accretive to its shareholder value in 2008. Funding for the transaction will be provided from Softchoice’s current credit facility.
“We have been growing our hardware business by 20 per cent and when you combine NexInnovations customers and the certifications, plus the people it puts us at a whole new level. We are now in a great position to leverage the market in a quicker manner,” MacDonald said.
Market analyst Michelle Warren of Info-Tech Research called Softchoice’s acquisition of NexInnovations’ technology solutions business a wonderful move.
“This decision will enable Softchoice to broaden their reach, including moving deeper into some accounts. NexInnovations’ customers, who were shocked by the announcement last week, can trust that, if they choose to work with Softchoice, that they are lucky. The customers are the real winners with this announcement. Although, Softchoice shareholders will definitely benefit from this strategic business acquisition,” she said.
MacDonald agrees that the NexInnovations fall out will increase the channel’s overall bottom line. But, one of the reasons why he chose to acquire the assets rather than wait for disgruntled customers to approach Softchoice is that his company is able to control the customer contact, the supply chain, the order management system, and the onsite capabilities.
“We are now the incumbent,” MacDonald said. “By default those employees will come to Softchoice and everyone on the street is trying to take them. We are in a position to make those customers continue with us if we do a great job. We are confident in taking these customers and helping them grow. And, we want to help the employees grow in their careers more importantly.”
Softchoice does not have to honour NexInnovations deal with Tech Data to be exclusive with them. However, MacDonald said there are specific customer capabilities where they will use Tech Data’s supply chain.