Computacenter extends US reach with FusionStorm
Friday, October 10 2018
Computacenter’s acquisition of San Francisco-based FusionStorm, while not the largest in its history, is likely to be one of the company’s most important moves in recent years. It marks Computacenter’s long-expected expansion in the US, two years after opening a North American office to support international customers. This is in part about extending its service and support offering to European customers with US presence. But more significantly it brings Computacenter a platform for new growth, with a data center resell and integration business and cloud consulting practice to complement its existing managed services business, and a new base of North American customers – including some high-profile Silicon Valley accounts.
This also represents one of the few recent moves by a major European channel partner into the US, when most of the direction of expansion has been West to East, with CDW, SHI, PCM, WWT, Zones and others establishing beachheads in Europe. Other European resellers have opened US offices, but few have the scale or the ambition to launch a full-scale assault across the Atlantic, with most relying on local partnerships to serve multinational customers (Dutch IT services provider Getronics’ acquisition of large US channel player Pomeroy in July is one of the few recent exceptions). Computacenter, despite its leadership position in Europe, is still relatively unknown in the US market. Until 2016, it had partnered with local player CompuCom, until setting up its own greenfield office. This move will serve to boost its profile and brand, doubling its US headcount to around 1,000.
Yet Computacenter will be conscious of the high failure rate of European companies trying to break into North America and is clearly keen to minimize financial risk in its expansion. It has chosen FusionStorm over a larger, more expensive target. FusionStorm, with 2017 revenues of US$595 million, sits within the top 30 US IT resellers, and is just over tenth of Computacenter’s size. Computacenter will pay an initial US$70 million in cash for the business, with an additional US$20 million paid on achieving profit targets in the following 15 months. The cultural integration of FusionStorm into Computacenter’s European-led organization will be key to the success of the deal. Computacenter’s current Americas CEO, Mike Keogh, will take over from long-term FusionStorm CEO Dan Serpico after a short transition period, but European management must be careful to manage potential cultural tensions to avoid a loss of key staff.
Computacenter sees opportunity to boost FusionStorm profits
Computacenter will also inject US$45 million in capital into FusionStorm to refinance existing debt facilities, in part to reduce FusionStorm’s high interest payments on short term debt. Profitability is one of FusionStorm’s biggest challenges – it generated just US$3.5 million pre-tax profits in 2017, less than 1% of revenue, pulled down by interest charges and internal ‘ownership’ costs. Computacenter believes it can cut both to boost operating profits, although with the US Dollar strengthening against the British Pound, it will also find its costs rising in the US. The impact of US trade tariffs on some of FusionStorm’s networking and data center products could also impact margins, though this will be an industry-wide issue throughout 2019. Shareholders are broadly welcoming the move, with shares up slightly since the news, after declining since the summer.
Computacenter’s US ambitions are understandable. It has enjoyed double digit revenue growth in Europe over the last four quarters, led by healthy product sales. Expectations for the rest of the year remain positive, but maintaining these growth rates will become increasingly difficult in future with a reliance on organic growth. Uncertainty over Brexit creates an obvious risk. Its strategy to focus on a core base of large corporate and public sector customers has proved successful, although it also creates reliance on a small number of big deals every quarter. With the vast majority of its commercial operations focused in France, Germany and the UK, the company still lacks the international credentials of some of the largest US resellers. Computacenter’s M&A strategy has picked up pace in the last 18 months, and its latest purchases of Misco Netherlands in September and FusionStorm mark a new phase of international expansion.
FusionStorm brings capabilities in servers, networking and hybrid IT, as well as managed endpoint services (a key focus for Computacenter) and consulting expertise. Combining FusionStorm with Computacenter’s existing US customer support operations creates a business profile more in line with Europe. FusionStorm is perhaps most recognized outside the US for being, along with Computacenter, one of only ten Dell Titanium Black partners globally (and one of only five in the US), reflecting its close relationship and sizeable business with Dell EMC. Dell EMC is FusionStorm’s largest vendor, accounting for a significant share of its product revenue, primarily with server volumes. This will give a boost to Computacenter’s own Dell EMC business and further elevate Computacenter’s importance to Dell EMC at a global level. FusionStorm is a Cisco Gold partner which is also important for Computacenter. Other top vendor partnerships include HPE, Pure Storage, Nvidia and Juniper.
Financial health of the channel is driving M&A activity
Channel M&A is gaining momentum in the wider European channel, led by some of the region’s largest resellers which are generating cash from strong product sales and enjoying high stock prices. Since the start of the summer, high profile examples include Bechtle acquiring Inmac Wstore in France, Dustin buying Vincere Group in the Netherlands – its first major expansion outside the Nordics, with more acquisitions to come funded by a SEK600m (US$66 million) stock issue – and Cancom purchasing OCSL in the UK. This is a buyer’s market, with many smaller channel partners up for sale, although with stock prices starting to wane, the urgency to move quickly could increase. Canalys expects further consolidation in the rest of 2018 and into 2019. With Computacenter setting its sights more firmly on the US, this could prompt further similar moves by some of the big US resellers seeking to capitalize on Europe’s healthy IT market.
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Canalys Americas: Palo Alto, USA Tel: +1 650 681 4488
Canalys EMEA: Reading, UK Tel: +44 118 984 0520