Solution Provider Valuations on the Way Up

Opinion: CDW's buyout by a private equity firm for a premium over its share price means higher values all around for profitable service providers.

For a lot of solution providers CDW has been nothing short of a mortal enemy, ranking right up there with Dell in terms of using volume purchasing to drive down margins. By leveraging the volume it sells, CDW has historically been able to get better pricing from suppliers, and it has used that advantage to win a fair amount of business over the years.

So it's with some bittersweet irony that solution providers are greeting the news that CDW is going private in a deal worth $7.3 billion. The bad news, of course, is that CDW will use that funding to compete more aggressively than ever.

But the good news is that investors were willing to pay a premium in part because CDW has developed a recurring revenue business model. A lot of the revenue comes from CDW's slow but steady approach to building an IT services business, first around basic technical services that has now evolved to include a full set of managed services offered through the Berbee subsidiary it acquired last year.

Part of the thinking at CDW is that they will use some of this private equity money to acquire additional companies similar to Berbee. That may be good news for some of the owners of the solution providers that CDW chooses to acquire at a price that will probably be higher than before a private equity firm paid a premium of $7.3 billion to take CDW private.

Read more here about the CDW acquisition.

But CDW is not the only company looking to acquire solutions providers. In fact, among the rest of the solution provider community there is a race to reach the $1 billion in sales mark. Companies that have set their sights on this goal include Agilysys and Logicalis, and none of the major players seeking to reach this level of sales is likely to achieve it through organic growth alone. For example, Agilysys earlier this month bought Innovativ, a major reseller of Sun Microsystems solutions.

Ironically, the emphasis on growth in the channel is also flying in the face of the call by vendors for more vendor loyalty among solution providers. The truth of the matter is that no solution provider is going to reach hundreds of millions of dollars in sales by selling solutions from, say, only Hewlett-Packard.

We're a long way from reaching the end of the hunt when it comes to the consolidation frenzy that is currently reconfiguring the channel as we know it. But the one thing that is for certain is solution providers with discernible strategies for generating recurring revenue will be the ones that profit most handsomely once the dust finally settles.