ASX-listed reseller, Volante Group, has made a bid to acquire Ipex Information Technology Group, to form what would arguably become Australia’s largest reseller and IT service provider.
The two companies began discussions in September before agreeing on terms just prior to Christmas. Volante shareholders will ultimately have the final say when they meet on February 12 to vote on the proposal.
The complex deal would see Volante issue $70 million worth of shares to the private owners of Ipex, a small percentage of which would be paid upon certain milestones being achieved.
Volante has proposed that the majority of Ipex’s IT services business would be integrated into the Volante Systems business unit, which would continue to be managed by Hugh Bickerstaff.
Ipex’s application development services would be integrated into the Volante Solutions business unit, while Ipex’s computer manufacturing business would remain a separate entity and continue to use the Ipex brand name. Ipex-branded computers would continue to be sold alongside the products of Volante’s vendor partners, the company said.
If the acquisition goes ahead, Ipex owners, Joel and Yoav Schwalb, and their business partner, Michael Stiassny, will become board members of the Volante Group alongside Volante’s managing director, Allan Brackin, non-executive director, Harvey Parker, and chairman, Robin Crawford. Current Volante board members, Hugh Bickerstaff and Chris Greig, have agreed to step down from the board if the acquisition goes ahead.
Collectively, the former owners of Ipex could stand to own some 46 per cent of the Volante Group after the acquisition is complete.
Strength in numbers
Brackin described the proposed merger as a major step towards Volante’s aims of building Australia’s leading IT solutions, services and selective outsourcing company. The company expects revenues to rise by some 55 per cent after the acquisition is complete.
“If you were a large Australian corporation or Government department, Volante is one of the few local companies you could look seriously at [for IT services],” he said.
In a letter to Volante shareholders, chairman Robin Crawford said that despite providing shareholders with some of the best returns in the IT sector, the contraction of the IT industry had made it near impossible for Volante to achieve organic growth.
“In the present IT market, rapid organic growth is not a realistic option,” he said. “We have investigated many merger or acquisition opportunities, but until now we have not found a suitable partner that shared our goals and was willing to negotiate fair and reasonable terms to go forward.” Brackin said there were still many acquisition opportunities on the horizon.
“Some of the companies we looked at would have been a good fit but couldn’t get over the line,” he said. “We are considering more already, not so much in infrastructure services, but in consulting and application development.”
In order to convince Volante shareholders to vote for the proposed merger, Volante’s management contracted Deloitte Touche Tohmatsu to compile an independent report into the likely outcomes of such a merger.
The report asserts that the transaction is “reasonable” — that the merged entity, with 850 staff and $500 million in revenues from day one, is likely to have greater growth prospects and revenue opportunities.
The report highlighted that the two companies have a complementary geographic presence (Volante is strong in Brisbane, Sydney; Ipex is strong in Melbourne, Canberra) a complementary customer base (Volante is strong in corporate, Ipex is strong in Government) and a complementary range of products and services.
But the report also discussed some risks, which are likely to have some bearing on shareholder confidence in the merger deal. There is some uncertainty clouding Ipex’s future outsourcing revenues.
The bulk of Ipex’s services revenues are earned via the fulfilment of the Group 8 Federal Government outsourcing contract, which is worth approximately $40 million per annum. On June 30, Ipex will be advised as to whether the outsourcing agreement will continue beyond its expiry date has June 2005. Most of these large outsourcing deals have been broken up in recent years as Government departments look to procure IT infrastructure and services through selective outsourcing.
Brackin said the Group 8 contract was a significant element of the deal and was confident that Ipex had been satisfying its clients. But he also wants to keep the deal in perspective.
“This is one deal — Ipex has some other outstanding contracts,” he said. “At the moment, there are deals all over the place. Already this year we have won a large corporate deal and Ipex has won a large Government deal. There are Government opportunities in Canberra, in South Australia, and a whole pile of corporate deals on the horizon.”
The second risk shareholders will need to assess is the health of the $1 billion Australian computer manufacturing industry, which IBIS World research suggested in the Deloitte report, is experiencing decline.
Ipex is one of the largest computer manufacturers in Australia.
IBIS World forecasts that the decline will continue. Revenues earned from the manufacture of computers will sink a further 6 per cent over the next five years, it said.
There is also some potential for conflict between Volante and its traditional channel partners in the computer space. Volante may soon be manufacturing personal computers and servers that compete with its vendor partner’s products.
Volante is one of HP’s largest resellers and was last year named as its Enterprise Reseller of the Year. HP has released a statement describing Volante Systems as a “long-term strategic partner”, and confirmed that Volante would continue buying product direct from the vendor.
“The merger with Ipex will not affect the strong relationship that Volante Systems and HP have forged together,” general manager of HP’s personal systems group, Tony Bill, said. “In fact, the new Volante Group’s increased focus on services will provide a natural increase of HP product business, specifically in client access devices, storage, Integrity servers, Alpha and all other HP infrastructure sales.”
Brackin said there was “no way [Volante] would try and do something that would upset vendor partners”.
“We will conduct business much like we already do,” he said. “We supply the right product for the right customer. Our services business goes after outsourcing contracts, involvement in large projects or involvement in application development. It is from there that we bring in the products, not the other way around.”
Brackin was confident that shareholders would agree to the merger, and that corporations as well as Australian governments would also look to Volante more often in future years.