Prices stall mergers

Prices stall mergers

A local financial broker has claimed consolidation in the distribution industry is being held up by unreasonable financial expectations.

Newport Capital has been assisting ASX-listed distributor, Cellnet, size up the market and enact its acquisitions strategy. While most distributors were prepared to talk about potential mergers or buyouts, business values were a re-occurring stumbling block.

"Most distribution businesses in Australia are privately owned so they are happy to enter into discussions," Newport managing director, Lou Richard, said. "The major obstacle is value perceptions: the owners may have worked in the business for 10 years, are doing $25 million in revenue, making money on their bottom line and have a good lifestyle.

"They have value perceptions based on what they need rather than a real understanding of the value of the company."

Richard has been working in the ICT distribution sector for nearly 20 years. He was head of PC distributor and Computer Power subsidiary, CP Powerlink, in the 1980s, and also worked for Computer Resources Group.

itX managing director, Laurie Sellers, agreed many distributors had overblown expectations of their worth. "A lot of businesses you look at are predominantly small to medium in size and have been started up by one individual or a small group of people," he said. "They have a close association with that business and an emotional link to it. They put value on emotional content. "Although they may be looking for an exit strategy, or the next growth phase, they're not going to let it go at a cheap price."

Cellnet managing director, Adam Davenport, said privately held companies could often have complicated director and bank arrangements which made acquisitions difficult and values unclear.

"We would have liked to have bought more and bigger organisations but this has proved difficult," he said. "Price is the main factor. Distributors don't attract very high evaluations, unlike software companies or systems integrators. They have low multiples, their vendor contracts can be cancelled at short notice and there's no significant stickiness with customers.

"It's a tough business: margins are low and unit prices are falling. The real value of these businesses can be quite low."

Newport's Richard said there was a proliferation of tier-three suppliers. "Some people are maintaining lowcost models and doing well, but there are also people with difficulties in terms of margins and cost," he said. "The inevitable outcome is that there will be fewer companies rather than more. Businesses in the third tier have to focus on specialist products and services or they won't survive."

Although looking for larger acquisitions, Davenport said smaller businesses often had a better grasp of their costs.

"The low-end players are struggling, but they do survive," he said. "They pay extremely close attention to their costs and have superb client relationships. Even though they're small, they are still making good margins." Dicker Data managing director, David Dicker, said one of the main differentiators between distributors today was vendor partnerships. These were becoming harder to obtain and increasingly required large investments.

"Alignments are the key," he said. "In the past, it wasn't that difficult to get an alliance with a vendor pretty much for free. But now, take us for example: we had been dealing with Compaq for years, but we still can't get HP's IPG [imaging and printing group]. That is what has changed things in regards to company value." itX's Sellers argued the market was in better shape than 2-3 years ago.

"Spending has definitely increased and there has been consolidation. I think that's helping those distributors still thriving by aggregating business within a few larger players," he said. "But there is still a lot of opportunity to consolidate further."

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