Channel M&A Kingpin Martinwolf Celebrates 20th Anniversary: After $5 Billion and 150 Deals, Market For IT Services Businesses Is Hotter Than Ever

Even after building a channel M&A business that has brought 150 deals worth $5 billion to fruition, Marty Wolf still refers to himself as an "IT industry guy."

It's not a moniker Wolf takes lightly given that it is his and his team's knowledge of the nuts and bolts of the IT services business that has made Martinwolf M&A Advisors one of the pre-eminent deal-makers in the channel.

Wolf, in fact, spent 12 years as a solution provider and distribution executive before he decided to take on the Ivy League world of New York investment bankers with little more than a Compaq laptop and a $350 mini-fridge filled with sodas.

[Related: 15 M&A Deals Reshaping The Channel: December 2016]

"I never worked for an investment bank," said Wolf, who later Friday along with 12 associates will celebrate the official 20th anniversary of the company he started at the Stadium Pub, a short walk from his office. "Our differentiator is we really understand the business, how these companies operate and make money. We can explain it and articulate it clearly and we know who it makes sense to go to and not go to. We don't need to run a spreadsheet for that. That is our advantage. Much of what happens in M&A is not finance. It is an understanding of how these things come together. We take great pride in the fact that when we work with buyers they get the results they want, and when we work with sellers we hit the bid."

Getting the "results" both buyers and sellers are looking for has led to deals in 20 countries with the biggest and best in the technology business including Microsoft, CSC, Bain Capital and Silver Lake. It has also resulted in Martinwolf selling the technology services divisions of seven Fortune 500 companies including General Electric's training division, Staples' managed services business, Johnson Controls' network infrastructure business and Insight's wholesale division. Among the companies that have done multiple transactions with Martinwolf: Rolta, Insight and Softchoice.

"It's unbelievable, when I started this business I never thought we would have people march into our office from all over the world," said Wolf, who as founder and president of the firm that carries his name is up before dawn working the phones and frequently travels overseas – twice to India in the last month -- to get deals done. "We punch above our weight class. We are closing a deal now with one of the top private equity groups. You can't make this stuff up."

Wolf's inspiration in starting the business came, in part, from an encounter with a New York investment banker who was selling the $1 billion Merisel distribution business that he had headed up. That young investment banker associate's first question to Wolf: "What is a SKU?"

"We were a distributor and he didn't know what a SKU was," said an incredulous Wolf, who prides himself on hiring executives with industry expertise rather than those with investment banking experience. "I thought, this is the wrong guy to sell the business."

Wolf, who has a business degree from his beloved University of Michigan, credits two channel industry legends he worked with for giving him an MBA of sorts in the rough-and-tumble, fast-paced technology business: former Computerland CEO Bill Tauscher and former Computerland President and Compucom CEO Ed Anderson.

"I learned from the best," said Wolf. "I watched and listened and got an MBA and a Ph.D. in this business. I didn't even know what working capital was until Tauscher taught me that. He is a financial guru and sales impresario."

As for Anderson, Wolf says he is nothing short of a technology genius. "Nobody understood the technology better than Ed," said Wolf. In fact, Wolf recalls touring an HP printer factory with Anderson and then-CEO Lewis Platt with Anderson knowing more about "unannounced products" and the future road map than some HP executives themselves.

Wolf says it a passion for working with what he calls the "smartest, hardest-working and thoughtful business leaders" on the planet that has been the spark that has kept him putting in endless hours -- long days and nights -- into deals that can sometimes takes years to complete.

"What I love most is working with really smart people that you learn a lot from," said Wolf. "The owners and CEOs running these IT services businesses are the best businesspeople in the world – period. I'd match them up against the leader of a similar-size business in any other industry – consumer and packaged goods, retail, financial services. They have to have more skills. It's a tougher business. And one of the reasons why is the vendors are so unpredictable. There is a not a complete overlap between what the vendors want and the customers want. You have to make it work."

Most solution providers earn less than 10 percent EBITDA (earnings before interest, taxes, depreciation and amoritization) – a far cry from many industries that earn 25 percent after taxes. "There are channel companies that spend almost 100 percent of their gross margin on SG&A and then you have companies that spend 50 percent," he said.

Among the CEOs Wolf considers the best and brightest that he has worked with over the years: CDW CEO Tom Richards, Insight Chairman Tim Crown, former Saber Corp. CEO Nitin Khanna, and Strategic Products and Services founder John Poole. "These are business visionaries," said Wolf. "These are executives that could have gone to work for General Electric and taught them something."

Wolf says one of his greatest career highlights was doing a deal to sell the $200 million distribution business for two companies that he previously worked for that had combined – Computerland and Inacom. That deal saved the jobs of hundreds of employees who would have been put out of work as a result of the eventual bankruptcy of Computerland-Inacom. "The people we saved were very happy," he said.

Among the employees who have worked side by side with Wolf the longest are 18-year veterans Linda Youk – Wolf's indefatigable executive assistant – the front line of sorts for the company. ("People are predisposed to like me after they talk to Linda," said Wolf. "She's my right arm.") and Managing Director Anthony Lembo, the former Dataflex president ("He knows more about finance than anyone I know," Wolf said.)

Among the credos that have served Wolf well over the years: Michigan football coach Jim Harbaugh's "Who's got it better than us?" rallying cry and the Galaxy Quest motto of "Never Give Up! Never Surrender!"

"I believe and live that Galaxy Quest motto and so do the executives in the channel," said Wolf. The perfect example, said Wolf, is PCM founder and CEO Frank Khulusi, who started the company as PC Mall and has reinvented the business multiple times in the wake of vendor channel and technology shifts.

"Frank Khulusi is like the energizer bunny," said Wolf. "He keeps on coming back for more. The value of his business is up 300 percent this year. That is why I love this business."

Some Martinwolf statistics: The average deal takes about five months from start to finish; the shortest deal done was 87 days; the longest deal to complete was 18 months, although the company has helped reposition one company in a deal that took four years; the first deal done by the company was the sale of a Lafayette, Ind., solution provider for $2.5 million – paid out over three years; and one of the most impressive deals that was eventually flipped: the purchase of a minority investment by Bain of VXI Global ,which had a $460 million valuation and then sold last year to Carlyle Group for $1.7 billion.

The valuation numbers have changed considerably since Wolf started the business 20 years ago. Product-oriented solution providers in those early days were valued at 60 percent to 80 percent of sales. Now those same product-oriented solution providers are valued at 15 percent to 25 percent of revenue.

"When I started in the business, solution providers made over 25 percent on product and the business was growing at 25 [percent to] 35 percent per year," said Wolf. "Today, product margins are less than 15 percent and the PC market has been flat for five years. That is why the product-oriented businesses are worth less. They generate less profit and there is less growth and the future stream of earnings is less."

That said, the valuations of cloud services companies fueled by recurring services revenue have skyrocketed, said Wolf. It is that rise in the valuations of the cloud services companies that has Wolf optimistic about an increasing number of M&A deals in the years ahead.

"Cloud is much more disruptive than people really want to talk about," he said. "It upsets the ecosystem in terms of capitalization and so forth. The future of the business is in transformation. We have been arguing for some time that the core competency of solution providers is as customer aggregators. They collect and service customers. You need to be vertical, which means you provide real solutions – the more proprietary the better -- or horizontal. However, if you are too horizontal you either need to be consolidated or be a consolidator. If you are not doing one or the other you are in the bankruptcy gap -- the chasm that you don't want to be in. We expect to see a lot more M&A. There are very few options for companies to go public. We are looking forward to many big deals ahead."