2015 was a record year for mergers and acquisitions. According to The Wall Street Journal, the value of mergers and acquisitions globally was over $4.3 trillion. The IT industry was rocked by blockbuster deals that dominated the headlines. We haven’t yet felt the impact of the Dell-EMC-VMWare, Avago-Broadcom and Western Digital-HGST-SanDisk combinations, but we will soon, as these companies begin to integrate their organizations and partner ecosystems.
Last year’s high-tech M&A boom wasn’t solely focused on the hardware and software vendors. Consolidation in the IT channel accelerated, as large solution and service providers gobbled up competitors and firms with strategic assets. The CRN Solution Provider 50, the fifty largest solution providers in North America, were perhaps even more aggressive than vendors in pursuit of inorganic growth. These companies collectively executed more than 50 acquisitions in 2015. When we look back on the moves that these solution providers made over the last 12 months, one thing is clear: The rich got richer.
What else can we learn from the biggest IT channel mergers and acquisitions in 2015? And what are the implications for vendors in 2016? The recent M&A activity highlights five trends that are driving tectonic shifts in the IT channel.
1. Private equity is fueling consolidation. Private equity firms continue to flock to the high-tech industry, eager to profit from what they view as a fragmented industry with promising growth prospects. Private equity firms were behind some of the biggest vendor mergers last year. And firms such as KKR, Apollo Global Management and Millstein & Co. opened their checkbooks to capitalize on channel M&A opportunities, as well.
Private equity is rapidly driving consolidation in the channel as PE-owned partners gobble up smaller, regional players and extend their reach in key geographies and industry verticals. In some cases, mergers and acquisitions are bringing together bitter competitors. In other cases, such as the Clearlake Capital Group-funded Pomeroy-Tolt Solutions merger, companies that traditionally have served different customers are coming together.
The PE infusion in the channel shows no sign of slowing down in 2016. Vendors will find that some of their largest partners are getting larger and consequently gaining channel power.
2. Business models in the channel are blurring. Leading solution providers are taking steps to capitalize on burgeoning demand for cloud services, software and application development, mobile solutions and security. Innovative partners are investing to reduce dependency on declining technology resale margins and to develop higher-margin professional and managed services.
Some solution providers, such as Forsythe, are investing to build infrastructure that enables new service offerings. Other players are acquiring firms to add new offerings and capabilities. Some interesting examples are Presidio’s acquisition of cloud consulting firm Sequoia Worldwide and WWT’s acquisition of Asynchrony. These are clearly not your father’s old-school, box-mover VARs.
Solution providers were not alone in adding technical capabilities through acquisitions last year. Distributors, systems integrators and service providers made strategic acquisitions, as well. Insight’s acquisition of BlueMetal adds interesting consulting capabilities to its services business, for example. Moves like these will make it difficult for vendors with inflexible partner programs to place top partners in rigid business model categories when determining program requirements and benefits.
3. Solution provider diversification is accelerating. Sophisticated solution providers are investing to add arrows to their quivers. Successful partners are increasingly expanding their technical capabilities to diversify and provide a one-stop shop for their customers. Enterprise customers are looking for strategic partners who can move beyond serving silo IT groups (such as data center, networking and enterprise software). CIOs are focused on repositioning IT from the back-office “plumbing” that runs the business to a strategic weapon that enables business transformation and competitive differentiation. To achieve this goal, they need partners with deep industry expertise and a comprehensive suite of technical capabilities. The larger partners are responding by investing in sales and engineering. At the same time as they diversify their businesses, partners are reducing the number of vendors on their line card to focus on fewer, more strategic partnerships. As a result, as partners diversify, vendors will be in a fierce battle to capture partner mindshare. Some great examples of firms leveraging M&A to diversify are Sirius Computer Solutions and EPAM Systems.
4. The software channel shakeout is intensifying. Gone are the days when solution providers could make a living simply by chasing big on-premise software licensing deals. Software vendors are moving aggressively to SaaS and are pushing the channel to focus on cloud services. Some are using “carrots” by offering incentives for cloud deals. Others, such as Microsoft, are also using “sticks” and are eliminating traditional software licensing incentives.
Software channel partners are facing a difficult strategic decision: Either invest to meet new program requirements and develop economies of scale, or introduce new services to wrap around cloud sales. As partners resolve this dilemma, they’re restructuring their businesses accordingly. Firms like Software One and PCM have made their decisions and ramped up their M&A activity to execute their strategy.
5. M&A activity is promoting globalization and emerging multinationals. For years, only a handful of systems integrators could truly be viewed as global partners for vendors. As the channel evolves and solution providers scale to serve enterprise customers, they’re investing to build a global footprint.
Some solution providers, such as ePlus, dipped their toes into the international market for the first time in 2015 with acquisitions aimed to support U.S.-based customers abroad. Others, such as CDW, accelerated their efforts to set up international subsidiaries. Established global powerhouses such as Accenture, Deloitte, CSC, Logicalis and Dimension Data all acquired firms to expand coverage in key markets. Vendors are finding it increasingly difficult to treat their global alliance partners as outliers and will need to rethink how to engage these partners and enable multinational expansion in their pricing and partner programs.
The 2015 channel M&A boom is undoubtedly a harbinger of changes that will continue to reshape the IT industry in the years to come. Vendors that capitalize on these five trends will gain ground on competitors. Over the next several months, I’ll drill down into each of these trends in Tech Bytes & Insights blog posts highlighting the key implications for vendors in 2016. Stay tuned.