Value Drivers and Valuation Trends in IT Solutions

Ahead and Pomeroy acquisitions highlight increased interest in IT solutions providers and value-added resellers.

Thursday, December 17, 2015

There has been a surge in M&A activity recently among IT solutions providers. In the past month, William Blair advised Ahead on its sale to Court Square Capital and Pomeroy on its sale to Clearlake Capital and subsequent merger with Tolt Solutions. Since 2012, William Blair has also served as sell-side advisor on transactions for Kelway, ConvergeOne, FishNet Security, and Accuvant, and William Blair has completed equity offerings for CDW and ePlus. Other recent high-profile transactions in IT solutions include Kelso & Company’s acquisition of Sirius Computer Solutions, Apollo Global Management’s acquisition of Presidio, and the merger of Accuvant and FishNet to form Optiv.

As one of the most active investment banks in the IT solutions industry, William Blair has developed a unique point of view on the characteristics that financial sponsors and strategic acquirers are seeking when evaluating acquisition opportunities. In this report, we identify the five most important value drivers in IT solutions’ M&A activity and analyze trends in valuation multiples.

Value Drivers in IT Solutions M&A Activity

Through the transactions that we have completed and our ongoing conversations with financial sponsors and strategic acquirers, we have seen the following characteristics play an important role in driving premium valuations for IT solutions providers:

  • Focus on high-growth end-markets and sectors: The growth rate of the end-market that an IT solutions provider serves is one of the most important factors in driving value. Accuvant’s and FishNet’s focus on the high-growth IT security industry and Ahead’s focus on converged infrastructure played a vital role in driving interest in these companies. In addition to enhancing the size of the total addressable market, an above-average end-market growth rate also creates scarcity value for the provider’s services. In segments where demand is growing faster than the labor market’s ability to generate talent, firms that are able to develop specialized skill sets are able to command premium pricing from their clients.
     
  • Services capabilities that lead to strategic relationships with clients: Offering consulting or advisory services can be extremely valuable in helping IT solutions providers forge relationships with clients based on strategic advice, rather than a more transactional, fulfillment-centric relationship. By providing consulting at the onset of a client relationship, providers put themselves in a position to operate as a true trusted advisor. Providers with the ability to guide a client through an increasingly complex IT landscape will be viewed as a strategic partner fostering an ongoing, long-term relationship.

Transaction Spotlight
Ahead Acquired by Court Square Capital
Ahead’s extensive consulting capabilities and its focus on the high-growth converged infrastructure market resulted in robust interest from financial sponsors and strategic acquirers. The Company’s significant focus on providing cutting-edge architecture and design services around next-generation cloud infrastructure often positions Ahead as a trusted advisor to its clients.

William Blair served as sell-side advisor to Ahead on its sale to Court Square Capital. The transaction closed on November 2, 2015.

  • Managed services offerings that drive recurring revenue: Managed services creates a recurring revenue stream that provides closer client relationships and visibility to future earnings; this is highly attractive to acquirers and investors. As it is not dependent on software or hardware sales, managed services is seen as a highly complementary capability for which clients have a need, regardless of where they are in their technology upgrade life cycle. In addition to creating a long-term contractual relationship with the client, offering managed services ensures that the provider has high relevancy and visibility into the client’s day-to-day operations

Transaction Spotlight
Pomeroy Acquired by Clearlake Capital
Through a wide range of managed services, Pomeroy’s ability to generate recurring revenue streams was highly attractive to potential buyers. This interest was further bolstered by Pomeroy’s high degree of long-term relationships with large clients as well as geographic and industry vertical diversification. A key strategy moving forward is to further extend Pomeroy’s strength in end-user managed services into other core areas such as networking and storage.

William Blair served as sell-side advisor to Pomeroy on its sale to Clearlake Capital. The transaction closed on November 30, 2015.

  • Attractive margin structure: We believe gross margins serve as a proxy for the value that an IT solutions provider adds to the interaction with the customer, and consequently, potential acquirers look closely at a target company’s margin structure. Strategic acquirers have shown a reluctance to purchase companies that have lower gross margins than the acquirer, resulting in providers with higher gross margins being more attractive to a broader universe of potential strategic acquirers. Furthermore, higher gross margins also enhance the potential for leveraging the company’s revenue into EBITDA and cash flow as the company grows.

    It is important to note that some IT solutions providers book revenue on a gross basis while others book revenue on a net basis. The selection of which accounting methodology is used can significantly affect a company’s margin profile and have an impact on what buyers are willing to pay for the company. To mitigate confusion, financial advisors should clearly articulate which accounting standard is being used for each revenue stream.
     
  • Diversified vendor relationships: Companies that provide solutions for a broader array of original equipment manufacturers (OEMs) are viewed more favorably by buyers than companies that have a disproportionate share of revenue attributable to a single vendor. Having diversified vendor relationships reduces risk and makes the provider less dependent on the success of one OEM’s products.

Valuation Continuum for IT Solutions M&A



Trends in Valuation Multiples Over the last several years, IT solutions providers have garnered multiples that typically range from 6-8 times of the trailing 12-months’ (LTM) EBITDA. Transactions below that range usually involve companies that are subscale, have a regional footprint, and/or are focused on one vendor or solution. The companies that have commanded multiples at the high end of the range (or above), on the other hand, often display some combination of high recurring revenue from managed services, a national or global footprint, exposure to fast-growing sectors or end-markets, attractive margin profiles, and significant revenue from consulting or other professional services.

To learn more about these value drivers or other trends that are shaping the deal-making landscape in the IT solutions and VAR industry, please do not hesitate to contact us.

William Blair's Leading IT Solutions Investment Banking Franchise



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