What the Mortgage Crisis Means to the ChannelBy Michael Vizard | Posted 2007-07-31 Email Print
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Opinion: Tight credit means smaller budgets and fewer of the mergers and acquisitions that many VARs are relying on as their end-game.
The credit crisis that is starting to tear at the fabric of the financial services industry has an immediate impact on the channel as a whole and some potentially long-term implications for how solution providers run their business.
In the short term, the mortgage lending crisis facing the banking community means that there isn't going to be as much easy money available to finance mergers and acquisitions.
Private equity firms have been driving a lot of the mergers and acquisitions in the channel by tapping relatively easy credit from banking institutions. But faced with large amounts of bad debt thanks to defaults on mortgage loans, the banks are expected to tighten access to credit.
The downstream impact of tighter credit means that private equity funds will have higher costs when it comes to funding acquisitions and that is likely to make those deals a lot less financially attractive.
Longer term, the tighter access to credit could mean that solution providers will also have to rethink how they finance deals. While it may take up to a year for solution providers to feel the effects, it's likely that banks will demand better terms when it comes to helping fund major IT acquisitions.
The end result of that is that some solution providers may have to rely more on distributors, vendors or even the customer to help finance IT projects, as opposed to local banks or private equity firms that previously may have been more willing to invest cash in a solution provider.
The size of those IT projects is also likely to be affected because the cost of financing the deal will be higher, which means there will be less money allocated for the actual purchase of the products and services.
For many solution providers that are not well steeped in how financing works, a lot of these changes could be the difference between being profitable or operating at a loss. And while everyone is hoping the Federal Reserve will step in and make everything all right by lowering interest rates, it's not clear that the Federal Reserve is prepared to act any time soon.
So if you're not prepared for these changes to the credit scene, you might want to consult a financing expert because as anyone who has been around the channel for awhile knows, it's economic changes like the ones we're seeing now that break more solution providers than any one single technological event.