Logicalis CEO On MCPc ATIG Acquisition And Rampant Channel Consolidation

Major Channel Consolidation

New York-based Logicalis made channel headlines last month with its $42 million acquisition of Midwest regional solution provider superstar MCPc's advanced technology integration group.

In the hours after the acquisition was announced, Logicalis' U.S. CEO Vince DeLuca sat down with CRN to discuss a wide range of topics, including what the acquisition means for the solution provider behemoth going forward -- how the MCPc piece fits in with Logicalis' existing strategies and goals, how to make the best of MCPc's geographic strengths -- and why DeLuca says he is seeing more consolidation in the channel now than ever before.

Take a look at what DeLuca shared with CRN.

Why MCPc?

We ... liked a couple of things. One is, I liked the geographic footprint that they were in. It certainly complements our Midwest strength. In conjunction with that, the customer overlap wasn’t significant. We had geographic presence, we had customer strength in terms of the customer position, they have a great reputation and their culture was fantastic.

When I looked all of those elements it added up to what I thought was a really strong asset that would help us, and obviously they have their own plans in terms of what they're doing, but a really strong asset that would help us extend our strategy and continue to make inroads to growing our business through an acquisition that they could separate that one part of their business out with.

How does this fit into the Logicalis strategy?

Our strategy is still the same. We see a major transition and shift that's happening out there. We see a services-defined enterprise as the way that most companies and customers will look to consume technology through a lens of service. ... But, our strategy hasn't changed. We see the core business continuing to have its own struggles through this transition. MCPc has a high-efficient-running business in the core, but when we bring both of the organizations together and we're able to take their consulting capability, their domain expertise in health care, their domain expertise in SLED, and then our advanced services using third platform, it's a really, really strong match.

How will the partnership between the two companies work on a practical level?

Obviously, this thing is slated to close in September. Once that happens, we are going to go to market through a pretty tight partnership. ... They will lead and go to market with their end-user experience capabilities. We'll lead and go to market with our advanced technology and service capabilities. ... We'll coordinate and approach those customers with a high degree of consideration on how all of that unfolds and then attack those customers in the right way ... with a very coordinated approach between the two companies once the close happens. We'll have a transition service agreement in place for a period of time as things unfold.

How important is it for Logicalis to stay ahead of this market shift that we're seeing, and how much pressure are you under to make that transition?

I think it remains vitally important. ... The investment required to keep your position isn't an inexpensive one. The amount of resources that we'll need to change in our organization over the next few years is probably close to about 40 percent. It's a pretty significant investment and I think it's vital for us to stay ahead. If we don't, I think we get ourselves into fairly significant trouble pretty quickly.

Talk about the consolidation you're seeing in the channel.

We're seeing more activity in the M&A space on the sell side now than we've ever seen. Some of it is just focus, which in this case I think that was MCPc's motivation for doing this. But, they also know that in the business that we're in and the business that ATIG was in, it's shifting dramatically. Access to capital is very different. Business models are changing considerably. Service orientation at the highest levels is the dominant way that customers will consume technology. I think it's vitally important that we continue to stay positioned along this transition and be out in front of it. ... If you look at the financial models, I think part of the extraordinary activity that we're seeing in the M&A space is a direct result of these financial models changing so dramatically.

How important is having scale to make that transition? Will more regional companies like MCPc have to turn to a company like Logicalis that has that scale to execute on a transformation?

I think so. We've made a tremendous amount of investment in a service platform. We've made tremendous amounts of investment in software. We've made tremendous amounts of investment in domain-based consultative skills, like in health care, etc. Those aren't cheap. The companies that don't have highly efficient operations or don't have some sense of scale already built in, for them to infuse that investment into the corporation under an operating plan that already has a pretty tight margin base on the core without scale, it's pretty difficult to make that shift without really financially leveraging yourself in a big way. It's a big risk. I think companies that are a bit smaller are turning to the likes of Logicalis. I think we'll still continue to see further consolidation in the industry and I think we'll see a heck of a lot more of this happening quicker. ... I probably see 10 a week coming across my desk right now.

What's the role of acquisitions for Logicalis' own transformation strategy?

In the U.S., our acquisition strategy has three tenets to it. One is, for us to continue to gain scale in our core markets. ... The second one is for us to further our service capability. The third is to really advance ourselves in third-platform capabilities and technologies. ... The MCPc transaction is along the lines of that first one. ... We'll have a combination of both internal investment as well as acquisition targets to further ourselves along this transition. ... You can certainly build some of these things from scratch. If we take security as an example, we have certain security capabilities, but for us to get where we need to get to in the time frame that we're talking about getting there, we'll probably need to acquire something for us to get there at the speed at which we need it.

When you go out to buy a company, what are you seeing in the solution provider space for valuations?

It's interesting. We disclosed the purchase price of this acquisition and I actually saw a CRN article ... that said we paid a premium compared to some other asset. It's so misleading because what they don't understand is whether the business that's being acquired, even it's a $133 million-revenue business, certainly don't know how efficient or inefficient that they're running. Generally speaking, notwithstanding that one issue, for this type of company, we're seeing revenue multiples at about 1/3. We're seeing even multiples of 3-4x. I think that's come down a bit, but that's what we're seeing in this traditional space. Annuity-based services, some of these newer technology companies, they go up astronomically from there.

When you talk about that it's a seller's market, who is looking to get acquired? Traditional companies? Services companies?

Certainly the traditional value-added reseller companies. There's a lot of them out there. But, we're also seeing process-orientation, like ITIL-process or ITSM-process companies, that are looking to do some things there. They are looking for more than expanded capabilities outside of just a niche. We're seeing recurring revenue and managed services companies all over the place. What we don't see is a lot of the ... third platform companies, except for security. I do see a lot of security companies out there now, but the multiples they're demanding are through the roof.

How big is advanced technologies as a percentage of your revenue today, and where are you looking to take it?

This is just the U.S., in terms of Logicalis. That core business still represents around 75 percent of our business. We'd like to get it to be optimally about 50 percent in the next three years.

With the other 50 percent being?

Outside of that core integration business, I think the rest of it is in the form of advanced services, so cloud-based services, mobility services, security. It will be in the form of services.

As you integrate this, where are you investing the most internally?

If you look at our investment mix, most of it now is in cloud, software and domain expertise in health care. This is all U.S.-based. We're putting a fairly significant investment in our cloud capabilities and platform and services, which we think a hybrid model is going to be the dominant model going forward. We're certainly putting investment in software. ... We know we have to ramp up our skills in software. We've made a lot of investment in bringing in capabilities into our team, consulting and otherwise, in the health-care space.

How is what customers are demanding evolving?

They're asking us for a position, basically. They're asking us to bring expertise through our experience base to help them shape what they're trying to do. ... As an example, in the past [in our health-care practice], we have dealt with a data center manager or someone in the infrastructure group or even a purchasing individual to help them design and understand their data center infrastructure requirements. Now, we're talking to them about patient experience, we're talking to them about telehealth and telemedicine, mobility and the Internet of Things, video. It's a very, very different discussion, and we need the domain experts to be able to do that.

What's the 2015 outlook? Will we see more of these acquisitions?

We're in our second quarter, so our fiscal year starts in March. We're seeing a pretty decent finish to our first half. We will continue to be active in the M&A space for the right assets. Again, it's across the three pillars that I talked about. We feel pretty good about where we're at. We certainly feel good about the market, despite some of the pressures in terms of margin pressures on that core business. At the end of the day, if you look at the entire supply chain, all of the swim lanes are changing. This transition is real. It's meaningful and we have to continue moving. But, despite all of those hurdles, we still feel pretty good about the market, our ability to service our customers through traditional capabilities as well as some of these advanced capabilities that we're looking to build or acquire.

Anything else we missed?

At the end of the day, when we joined forces here and talked about this, it really was all about the customer. I just feel extremely strong that the two organizations coming together are going to give our customers a much stronger base to operate on, whether it's through a service lens or it's through our international capabilities. Our customer base will definitely be benefactors of this. Certainly, we're excited about having 110 employees join us as well. I think it's important, while the fundamental business rational was there, we focus just as hard on the customer experience and the employee experience, which are paramount to our success.