Consolidation
By Bob Boyles, Founder & President
Smarter Distribution

It was approximately 20 years ago that I was fresh out of school and took a job as credit manager for an electrical distributor that has since been gobbled up. A few weeks after joining the company and sitting in a cubby hole of an office they made a foolish decision and sent me out into the world to collect their debts. One of my first stops was an NACM meeting where I was to meet my fellow credit mangers for the first time. We were to share out credit experience with the contractors in the local market with the understanding that the information would be used strictly for credit purposes and not shared with the salesmen at our companies. Sadly I was later educated, that particular code of honor was rarely upheld by my fellow credit managers. But that first meeting was eye opening in another way. No sooner had we sat down to lunch when another of the credit managers present asked me in a loud voice so that everyone could hear. "I just heard that your company is being bought by XYZ and that the deal is practically done except the paperwork!" Humiliated, I mumbled something about that being news to me and kept me mouth shut for the rest of the afternoon. As soon as the meeting was over I scurried back to the home office like a scalded dog. Walked into the CFO's office and demanded to know why the company was being sold and how he could have kept that information from me during the hiring process only a few weeks prior! As I would later learn the CFO was a man of calm demeanor and he took this demand form a still wet- behind-the-ears new hire without any animosity. He calmly explained that the company was not being sold and that as CFO if the company were being sold someone would surely have walked into his office and asked to see the financials and that a conversation like that had not taken place. He then went on to explain that this business that I was so new in was full of rumors and half truths and that he heard rumors about our employer being bought on the average of once a month. (That particular company would not be sold for another 18 years!) Sheepishly I slunk back to my office and waited for the day to end so I could go home to my basement and finish the job of shooting myself in the foot. That day taught me that rumors are an every day part of this business and that very few if any are true and more importantly they rarely serve any purpose except feeding your paranoia

Software Buyouts

Today the rumors of buyouts are as rampant in the software business as they are among the wholesalers they serve. Every time I open up an email or read one of the industry magazines it seems that another software company has agreed to be bought out. While it may be great news for the owner trying to sell his business or the buyer attempting to expand their market share what does it mean for you the distributor?

Classical economic theory teaches us that consolidation is a by-product of a maturing market. In a mature market growth slows down when the majority of customers have already purchased the product and the potential pool of new customers shrinks. The market for distribution software is a mature market. Look around, at yourself and your competitors, almost all have purchased new computer systems. It is extremely rare to find someone that has not purchased a computer system at all, much less several over the past two decades. As the market for new software sales shrinks these software companies begin looking at buying each other as a potential way to grow their overall sales. This effectively reduces the number of competitors in the market. The same thing is happening in the distribution marketplace itself as wholesalers buy each other as a way to grow their distribution footprint and increase market penetration. Economic theory goes on to tell us that there is nothing that we can do to stop consolidation, it's going to occur whether we like it or not. Consolidation is a natural part of the how markets evolve and maintain their efficiency.

What has been happening in the distribution software market is a little different than what has been happening in the consolidation of distributors. Larger software companies are looking at purchasing the middle market suppliers as a way of expanding outside of their traditional market. These companies have ready access to capital markets directly or through private venture sources and are gobbling up the smaller distribution software companies that have traditionally been privately owned.

This is not meant to be an inclusive list of companies that have changed hands rather simple confirmation that change is indeed been coming into this market.
Some of the recent purchases have been:

• Microsoft purchased Navision (5/02/2002)
• Intuit purchased Eclipse (7/29/2002)
• NxTrend purchased Dimasys (5/15/2003)
• Profit21 purchased Fastpac (08/15/2003)
• Profit21 purchased SDI (11/10/2003)
• Agilisys purchased daly.commerce (03/04/2004)
• Profit21 purchased DISC (04/12/2004)
• Agilisys purchased NxTrend (6/7/2004)

And there are many more buyouts that have been rumored on the horizon.

What Really Happens During After Buyout?

I am always leery whenever I hear about a buyout. I have been exposed to software company presidents that stood right in front of me and face-to-face stated ardently that they were purchasing this software company to expand on its vision. Only to have those same men in the same breath plan turn around and plan for it's demise while they switched their newly acquired customers over to a their dominant software package.

Stop and think about this logically for a minute. You're the president of a software company that has just purchased one of your competitors. Would you now spend millions developing and promoting their software or would you rather spend a fraction of that sum on marketing hoping that you can convince the majority of the newly acquired customers to switch packages over to your original software? All the while you are saving yourself a wad of cash as you bank those monthly support fees a portion of which was supposed to be going for new development that is no longer taking place.

But don't get me wrong, buyouts are not always a bad thing. Sometimes the company being bought needs to be bought to secure their financial viability. Often buyouts are simply a method of transferring the ownership as the current owners seek to retire or move on to other ventures. In some of the recent cases companies with access to capital markets are purchasing companies and actually investing in further development realizing that running their newly acquired companies as independent profit centers will produce growth in the long term. In some cases the acquiring companies are bringing in methods and expertise on how to produce higher quality software that this industry desperately needs. Occasionally the buyer is actually looking to acquire technology that they did not have and needed to secure their own future! The circumstances are as varied as the players themselves.

The Law Of Large Numbers

How should you as a distributor respond to this type of change in the marketplace? If your software provider is bought today there is not a lot you can do, except wait and see if the new owners say and do the right things to help you and your business succeed. For the wholesaler the only comfort is that there is safety in numbers. Let's say that your software company is on the ropes financially and needs to be bought out or face the demise of the company! If the installed base (the number of users of the software) is large enough potential buyers will circle around like vultures hoping to pick of cheap assets, highly trained staff and a revenue stream from the software users. When the company is bought the larger the installed base of the software the higher the likelihood that development will continue and that quality support will be provided.

Ultimately for the wholesaler software is just another tool and software companies are just another vendor, although a very important vendor. In the end the relationship you have with your software provider will depend not on who owns the company but on their ability to provide you with tools to improve your bottom line.

About Bob Boyles and Smarter Distribution:
Bob Boyles is the principal of Smarter Distribution in Coppell, Texas, a strategic coaching business focusing on assisting distributors in using technology. He is also the author of "Succeeding With Distribution Technology" a practical how-to guide for selecting and implementing the right technology. You may reach him at (972) 304-1180, via e-mail at bob@smarterdistribution.com or on the Web at www.smarterdistribution.com

© Copyright 2003, Robert S. Boyles Jr. All rights reserved. This article cannot be reprinted or reproduced in whole or in part, without the express written permission of Robert S. Boyles Jr.