Merger mania

There has been a spate of mergers and acquisitions in the Middle East channel during the past month, leaving the region to sample a taste of consolidation usually suited to markets where the rate of growth dropped to single digits years ago.

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By  Andrew Seymour Published  April 17, 2007

|~||~||~|There has been a spate of mergers and acquisitions in the Middle East channel during the past month, leaving the region to sample a taste of consolidation usually suited to markets where the rate of growth dropped to single digits years ago. But those who take the recent spike in M&A activity as a sign that the market is heading for a period of unprecedented change might want to refrain from counting their chickens just yet. I’m not sure that such a thing as an M&A enthusiast exists, but if they did then the past few weeks would have been one long, joyous celebration. Spectrum’s acquisition of ComGuard, i2’s deal with CompuMe, NTG’s purchase of Ebittkar in Saudi and, of course, Aptec’s capture of Tech Data Middle East offers a flavour of the unprecedented level of tie-ups bearing fruit in the market. Aptec’s decision to take over the bulk of Tech Data’s Middle East operation goes to show just what can be achieved through a single transaction. In one fell swoop, the distributor has virtually doubled the size of its business, landed a bunch of new customers, and gained vendor contracts it probably never previously stood a chance of getting its hands on. So why then has this mode of expansion not been more commonly seen or used in the Middle East? To answer that, we must reflect on events in developed markets such as Western Europe and the US where M&A activity remains a regular feature of the landscape. In order to assess the likelihood of more consolidation happening in the Middle East, you have to look at what sparks this kind of activity in the first place. It is all well and good for the buying party to say they want to expand their business, but in M&A land a transaction can only happen if the selling party is equally as willing to sell. Hostile takeovers might be the one exception to that rule but, quite frankly, with the bulk of companies in the Middle East IT channel falling under private ownership the chances of that happening in this region are remote. Indeed, whenever M&A activity does occur in this region it is interesting to evaluate why the seller agreed to be taken over. In most cases so far, the reasons for the sale have tended to be unique to the company rather than the typical factors responsible for consolidation in other markets. Take Tech Data, for example. Its ill-fated pursuit of profitability shaped its decision to sell up and get out of the Middle East. I’m sure other distributors in the region are also facing profitability issues, but I doubt whether they are under the same intense pressure to find an immediate suitor. Tech Data, on the other hand, was under permanent scrutiny from investors and governed by strict performance targets that meant it lived by a ‘get profitable or get out’ mantra. With shareholder dividends resting on its performance, there was never any chance that it could simply carry on in the faint hope that brighter days would one day return. Look at other distributors that have sold up in the Middle East, such as security specialist ComGuard. Conventional consolidation pressures didn’t force it to get taken over. It got taken over because senior management in charge of ComGuard needed to concentrate on other ventures – a reason that remains specific to that company. Of course, ‘ownership factors’ will one day have a huge bearing on M&A activity in the Middle East. With many channel companies privately owned by one or several individuals, the time will arrive when these individuals decide to call it a day, sell their stake and look forward to a comfortable retirement. When that development starts to kick in we will see plenty of distributors and resellers coming under new parentage in the Middle East. This trend is already evident in mature markets, reaching a peak in France, for example, a couple of years ago. Gallic entrepreneurs who set up technology and telecommunication firms back in the 1980s decided that after 20 or so years developing their companies the time was right to call it a day and collect their payout. Suddenly, in the space of 12 to 24 months, the market rapidly consolidated as a result of so many owners selling their business at the same time. Given the demographics in the Middle East, the same will happen here, though not for a while. You only need to look at the age of many IT companies operating in the Gulf region for confirmation that the market is still young. Most owners will believe that at this stage there is still room for them to grow and enhance the value of the business. They potentially risk losing a lot of money if they sell up now before the business has really hit its potential. There are other reasons too. In mature markets, the reasons for acquisitions are usually threefold. Firstly, it is used as a mechanism to either gain coverage or economies of scale– a popular motivation in the volume distribution space – or secondly to obtain new skills or technologies. Cases of broadline distributors buying smaller enterprise-focused counterparts, or resellers in one technology area moving into a new area through acquisition, have been a prominent characteristic of the European market for the last five years. Those characteristics are not yet visible in the Middle East, primarily because most companies can still expand their business organically. But they will come, as soon as market growth begins to slow and saturation finds itself a part of the Middle East channel vocabulary. They will come once vendors start streamlining their distribution networks rather than inflating them, and they will come when companies are forced to accept that the only way for them to significantly expand their business is through acquisition. I am not saying the regional IT channel won’t consolidate. It will. But for the foreseeable future I believe we will only witness sporadic periods of acquisition activity, driven largely by the behaviour and changing circumstances of the selling company. In my opinion, the trends driving fierce consolidation in more mature markets around the world won’t truly blossom in the Middle East until at least three years down the line, if not longer.||**||

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