Uptick in M&A Deals Hasn’t Satisfied Insatiable Appetite for Buyers, Sellers

My, but what a difference a couple of years can make.

Two years ago, we featured a number of major office technology dealership players in the merger and acquisition (M&A) space, and suffice it to say that the field of competitors has grown significantly in just the past 24 months. Even the office products set has dipped its toe in the waters with the announcement that Staples obtained DEX Imaging which, coupled with the murmurings that DEX is hiring personnel across the country, leads one to believe that it will seek to provide the service component to customers on a much wider scale.

The transactions are certainly not relegated to dealers adding dealers. At press time, Ricoh turned a few heads with the announcement it had acquired DocuWare, a provider of cloud and on-premises document management and workflow automation software. Sharp, Konica Minolta and Xerox are among the manufacturers that have expanded their direct operations, while EFI was sold to a Siris Capital Group affiliate for $1.7 billion.

Late last year, ECi Software added device management and assessment solutions specialist PrintFleet, print management solutions provider Print Audit, sales automation software specialist Office Document Consulting and Vineyardsoft Corporation, a leader in business activity monitoring software. CET Group obtained Q2 LLC in a deal among compatible products manufacturers. Even industry consultants got into the act, when BEI Services and Business Systems Consulting joined forces (check out our profile story on page 40) this past spring.

Favorable Conditions

This is just a small sample size from the bevy of deals that point to several talking points from the last time we explored the subject in these pages. For one, the industry remains highly fragmented. Players from a number of spaces (including venture capital and other subsectors) recognize the vitality of our industry for investment purposes. Sellers realize the economic conditions (economy, political culture and buyer access to capital) remain fertile. Finally, there’s the push toward expanding into managed services and ancillary offerings to fortify recurring revenue. Entities lacking the wherewithal to make critical investments are seeing M&A as the road to aligning with partners who can better provide that wider portfolio of products and services.

So, what have the past two years taught us, from a dealer perspective? Has the influx of transactions created over-inflated expectations among sellers? For that, we turn to our panel of M&A-active dealers to get their take on how the transactional landscape has evolved during that span.

Dan Ruhl, a principal at Oval Partners (the private equity arm behind Flex Technology Group), notes that the uptick in deals during the past two years has resonated within the dealer channel, leading them to believe that now is the optimal time—given business conditions—to move forward with a transaction. In fact, he feels those independent dealers who haven’t explored selling options in the past 24 months are in the minority.

I do think expectations are a bit higher today than they were a few years ago

Dan Ruhl, Flex Technology Group

“With the amount of activity and buyers who are out there, valuations have increased,” he said. “I don’t think it’s resulted in unrealistic expectations, in most cases. There’s always the business owner who says he heard this transaction happened at a certain multiple of revenue and he thinks that’s what his company is worth. But most business owners have a pretty good feel for how valuations work in this industry. I do think expectations are a bit higher today than they were a few years ago.”

Feeling the Pinch

RJ Young has methodically grown its presence within the Southeast. In fact, the Nashville, Tennessee-based firm is currently putting the wraps on its seventh deal in the past three years, according to Chip Crunk, president and CEO.

The move toward more high-tech offerings beyond the MFP box has stirred the belief in many suitors that now is the time to seek a potential M&A partner. “A lot of the smaller dealers are feeling the squeeze,” he said. “It’s making it more difficult for them to compete, and we’re seeing the increased interest. In years past, I needed to market myself out to find acquisitions. Now, they’re coming to us, because we’re one of the few companies out there still trying to grow their business.”

As a regional player, Crunk notes that there are few alternatives for the smaller dealers who are seeking to partner. “If you look at the big venture capital-backed dealers, they’re looking at companies in the $50 million to $100 million range, maybe a little less on the low end,” he said. “When they expand into new territories, they’re looking for core companies. We’re looking at roll-ups to increase our existing base.”

A lot of the smaller dealers are feeling the squeeze. It’s making it more difficult for them to compete, and we’re seeing the increased interest.

Chip Crunk, RJ Young

One of the more active players in the market is St. Cloud, Minnesota-based Marco, which has witnessed an uptick in the number of IT firms it has acquired. Jeff Gau, CEO of Marco, has noticed a pair of trends in deals during the past 24 months: rebounds from unfinished deals with other suitors, and dealers opting to stand pat for the time being.

Deal or No Deal

“What I’ve found in the last couple years is that if I’m losing out on a deal, it’s strictly to a no-decision where (the seller) didn’t do anything,” he said. “They might have a price in their head, and if we can’t hit that price, they think they should hold out for a while.”

An even more prevalent development is the growth in dealers who are testing the waters with multiple suitors. On several occasions, a would-be seller backed off from Marco because it had found a “better deal” with another dealership. Invariably, the seller would return to Gau because the higher offer didn’t result in a closed deal.

This development is somewhat borne out of inflated expectations, and underscores the importance of working through the due diligence process. “A company is only worth what it’s worth, and as professional acquirers, we have a diligence process,” Gau noted. “The validation process sometimes can bring a reality to what a company is really worth. I think the reality is that good, high-performing companies that are well diversified with a lot of fixed contracts, fully bundled, can bring more value than maybe a company that has less contracts, less diversification, less profit and maybe one or two good customers that skew the numbers. That adds some risk.”

The validation process sometimes can bring a reality to what a company is really worth.

Jeff Gau, Marco

Novatech, which is headquartered in Nashville, Tennessee, has built a strong base within the Southeast, but is also eyeing expansion opportunities in other regions. Dan Cooper, the firm’s newly minted president and CEO following Darren Metz’s transition to executive chairman, brought his 30-plus years of industry experience to expand upon the company’s growth platform.

Cooper notes that the industry has been consolidating at a variable pace for as long as he’s been in the business, and valuations have changed based on the number of organizations in buying mode. “Today, we see renewed energy and opportunity in the M&A landscape as the baby boomers and Gen X leaders seek to retire,” he said. “But as they do, there’s greater concern for their company’s future and what happens after the sale.”

Today, we see renewed energy and opportunity in the M&A landscape as the baby boomers and Gen X leaders seek to retire.

Dan Cooper, Novatech

One dealership that is highly active in the M&A theater at the moment is UBEO Business Services, with seven deals completed in the past year, including its watershed partnership with Ray Morgan Company. But 24 months ago, the dealer was not widely known outside of its home state of Texas. That all changed in April of 2018, when UBEO joined forces with Sentinel Capital Partners, triggering its current M&A tear.

Integration Strategy

Jim Sheffield, the company’s president and CEO, freely admits that he is surprised as to the volume of activity and interest he has seen in such a short period. “There’s a sense right now with small to medium dealers that this is the time where you need to pick your team,” he said. “This business has headwinds, and this is the time when you need to have power on your side. That’s part of the reason we did this, and dealers are attracted to that power. Owners are interested in hearing what we’re doing.”

While most of the other major M&A players have long since dealt with integration issues due to their wealth of experience in scaling, Sheffield confesses to a degree of “increased metabolism” in acquiring seven dealers, effectively tripling UBEO in size. The dealership is taking a measured approach to integrating new acquisitions, and recently implemented some best practices and made several strategic hires. The billing department has worked aggressively to bring all Texas billing under one roof, while customer bills in the western region will continue to be processed locally.   

Making the process as opaque to the customer as possible is a top priority. “We don’t want the customer to experience any disruption,” he said. “The expertise of our people during the integration process has really helped to avoid fumbling the football and disrupting the customer. That goes back to having quality people.”

This business has headwinds, and this is the time when you need to have power on your side.

Jim Sheffield, UBEO Business Services