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About a year ago, Logicalis chairman Mike Cox made a bold prediction: The North America channel will consolidate within the next five years to a handful of mega-VARs and a few hundred (that’s hundreds, not thousands) smaller local and regional VARs.

Cox should know about consolidation, since Logicalis—a $900 million global solution provider—is an aggressive shopper for smaller competitors to fuel its growth ambitions. It has snatched up complementary VARs ranging in size from $30 million to $120 million, pushing its revenues and market reach ever higher.

With each major acquisition announcement—CDW buying Berbee, FusionStorm buying Jeskell, Presidio Network Solutions buying Solarcom, Agilysys buying Innovativ—scores of small VARs take out their pencils and rough out their market value based on the multiples paid for their larger rivals. Many VARs report receiving regular calls from competitors, larger solution providers and brokers inquiring about their interest in being bought out. And scores of others are actively looking for suitors to take them into their fold.

An entire generation of VARs is on the verge of retirement, but acquisition doesn’t necessarily mean the end of a career. In many acquisitions made by Logicalis, the management team is retained, and the team remains untouched to ensure continuity.

“The ones we’ve brought in have been very strategic. We’ve been focused on maintaining the owners in the company. In some way it’s a cash out, but it’s also a step up in their careers,” said Eric Linxweiler, Logicalis’ senior vice president of solution services, in a recent interview with Channel Insider.

The past 18 months were a good time to be in the channel acquisition market if you were selling. Larger VARs paid a premium for smaller and complementary solution providers, while sellers reaped the benefits of converging market forces that produced high yields for their businesses. Even as the economy slows, many of those same factors will continue to generate M&A channel deals.

Some of the factors driving channel M&A:

Growth needs. As solution providers such as Logicalis get bigger, it becomes harder for them to grow. Single-digit organic growth simply isn’t enough, and accelerated growth requires an infusion of new market, product and expertise capabilities. VARs get that by buying another company’s existing client base and revenue stream.

Growth ceilings. Solution providers eventually reach their own growth limitations, in which they neither have the capital or resources to grow. In many cases, solution providers face the choice of taking on debt, going public or seeking private equity investments to fund growth—each option comes with painful tradeoffs. Selling to a competitor is fast becoming the preferred way of growing a business – albeit within the framework of a larger company.

Market access. Marketing and Business 101 dictates that one of the best ways to grow a business is by attacking a vertical market. VARs can often see new, lucrative opportunities in verticals where they have little expertise or penetration. A simple way to enter a new market is to buy a company that already plays in that market. This is what FusionStorm did with its acquisition of Jeskell—it bought into both an IBM storage practice (something it didn’t have) and the public sector market. To do that organically would have been time consuming and expensive.

Talent shortage. There’s a dearth of affordable, skilled sales and technical professionals. Vendors, solution providers and end users are all competing for talent from the same pool of available workers. Rather than hiring people one at a time, some solution providers are targeting other VARs for acquisition because of their talent pool. Through acquisition, they gain technical practices, people and resources.

Geographic reach. Smaller and regional VARs looking to secure the viability of their businesses often have to look outside their operational radius for new opportunities. Building the business infrastructure and hiring the staff is daunting and expensive. The shortcut is acquiring an existing solution provider that provides entry into the new market.

Channel optimization. Vendors are no longer recruiting massive armies of resellers, instead placing their bets on a focused number of partners who receive the lion’s share of their market support. In this equation, the nonpreferred resellers are often at a disadvantage, making it harder for them to compete. Eventually, this will force many to seek an exit strategy, which often leads to a “For Sale” sign on the business.

End of the Lifestyle. Everyone knows a lifestyle VAR or a solution provider that isn’t necessarily concerned with growth so long as it is maintaining a comfortable income and lifestyle. As these lifestyle VARs get older, they’re faced with the prospects of having to invest time and money into their business to maintain viability. Rather than make that investment and commitment, they choose the path of lease resistance—selling out. Lifestyle VARs founded in the late 1970s and early 1980s are ripe for retirement, meaning there’s plenty of capacity on the open market.

Will these factors continue to fuel consolidation to the point of Cox’s prediction? Will the channel eventually shrink and eliminate the middle-class VAR? The eventual outcome is never clear, but consolidation is a natural part of every industry’s life cycle and evolution. What VARs have to ask themselves is: What do we have to offer potential suitors? What is the real value of our business and how can we market it—either to grow or to sell?

Lawrence M. Walsh is editor of Baseline magazine and regular columnist to Channel Insider. Share your thoughts on channel consolidation at