Future of M&A in the Aussie channel? Consolidation, scale and brand equity

Amid a market of flurried uncertainty and access to cheap capital during the past 12 months, more than US$350 billion worth of technology mergers and acquisition deals took place around the globe.

Australian channel players were of course no stranger to such worldwide frenzy with mammoth deals including Capgemini’s purchase of RXP Services - for $95 million - sweeping the local IT sector.

Fast forward to 2021 and now, not only are technology companies competing against each other for the best M&A deals, competition is also emerging from cash-rich private equity giants and telecommunications firms. Not forgetting of course that non-tech sectors are also getting on the bandwagon as technology shifts from being “‘nice to have’ to an absolute necessity”.

So how is such consolidation impacting the competitive landscape of the Australian IT market? Outlined during the inaugural launch of ARN Partner Perspectives - an editorial-led virtual roundtable series - leading providers weighed in on the market implications of further channel consolidation, the key elements of a successful deal and the art of integration post-transaction.

“There is a widening gap between the larger-scale IT services companies at the upper end, who have a ‘whole of IT spend’ approach to market, and the more specialised service providers and consultancies at the lower end,” said Anthony Woodward, speaking as founder and CEO of Bulletproof, acquired by AC3 for $24.7 million in early 2018.

“This leaves mid-sized organisations and government agencies with less choice when the procurement hurdles are too high for smaller players,” the now-CEO of Accelera added, which snapped up Sydney-based cloud specialist Ayenem in July 2020.

As managing director of Correct Solutions, Ryan Spillane argued that consolidation in the channel is occurring at a far greater rate than is even publicly available. However, a positive result of this consolidation is an opportunity for new players to either start-up or enter the market, he claimed.

Likewise for Nathan Lowe, managing director of ASI Solutions, increased consolidation in the market is driving greater competition. Lowe, whose company completed its recent buyout of BEarena last year, argued that increased M&A is “encouraging companies to focus on innovation and efficiencies through these opportunities”.

Dialling in from Perth, Catalytic IT director Michael Lester told the virtual roundtable that certain specialist skills, such as cyber security, are starting to see some constraining of competition.

“Consolidation can lead to less choice for customers,” he said. “However, savvy operators identify these opportunities and return to the market providing competition, levelling out the field over time.”

One example of this, he argued, is the BGH Capital-backed CyberCX. “Cyber security firms who were traditional competitors in the local market are now occupying a single seat at the table with a business,” he explained. “While this certainly gives them greater opportunity, particularly with bigger organisations, it does leave room for smaller players to re-emerge and address the small to mid-market space.”

However, whatever the motive behind any deal, it is very important to keep the culture of the company you’re buying or your own when selling, argued Alex Gambotto, founder of The Missing Link. This, he added, is one of the biggest difficulties of the M&A landscape.

What’s driving the market?

From the buyers’ perspective, seeking out an acquisition is usually driven by three distinct factors: buying customer base, gaining specific skillsets or capabilities and geographic location.

Naturally, these drivers will have varying degrees of importance for individual partners. For example, Sachin Verma, co-founder of Melbourne-based Telstra partner Oreta, believes customer base is the top influence factor for an M&A, followed by skillset.

“The geographic location is not as important,” he claimed. “Many customers are accepting that their service provider may not be entirely local. They are more concerned about the quality-of-service level of expertise they will receive.” 

For Gambotto, all the primary reasons are key – either individually or collectively. However, during the current global economic climate, scale is the key driving force behind a number of acquisitions. With reference to the Australian channel, client loyalty and managed services contracts are very desirable in an acquisition, he added.

For Woodward, greater scale across geographies and customers form just one of the strategic approaches buyers are taking.

“[There are also] different, complementary offerings, such as skills and customers," he said. "There are also a few ‘house of brands’ plays in the market that aim to service customers across a range of needs, but not to lose the brand advantage those specific companies already have in their specialised markets."

Woodward noted Mantel Group, which acquired CMD Solutions in 2019 and recently launched a number of differentiated companies in Australia, was a prime example of this ‘house of brands’ strategy.  

Both Spillane and Lester agreed that Australia’s chronic talent shortage in terms of skillsets becomes a critical facet in any M&A deal, with many larger enterprises choosing to buy sorely needed skills rather than try to hire them organically. 

“It may be easier to acquire an organisation rather than source talent, particularly where specialist and niche skillsets are involved,” said Lester. “In smaller markets such as Perth, this is very pronounced, and particularly so if these top-quality people have chosen to go into business for themselves – you simply won’t get them any other way.” 

What’s in a name? 

To keep a brand name of an acquired company is a thorny issue – it only took NTT almost 10 years to finally change the name of Dimension Data in Australia. For Lowe, whether to keep a brand name or retire it depends on the overall motivation for the acquisition.

“It is not a one-size-fits-all approach,” he said. “There is sometimes a fair amount of goodwill within a brand that you do not want to necessarily retire immediately but over time, this strategy could transition as the businesses integrate.” 

Nick Moran, the founder of Evolve IT and now director of Powernet, faced that very dilemma back in 2019 when the two companies merged to create a mega-managed service provider. With 50 years collectively of brand equity in both names, renaming the new entity required consultation with both staff members and clients to ensure an easy transition to what-is-now simply Powernet.

"The number one piece of feedback from clients and our team during this process wasn’t about brand, it was entirely based on whether anything will change for them," he said.

The motivation behind an acquisition is likewise a key factor for Woodward in whether it’s necessary to retire an acquired brand.

“I have seen organisations conduct a brand review to see what their target market thinks of the acquired, as opposed to acquiring, brand, and use this input to decide whether to keep or retire the acquired brand,” he explained.

Although companies that do retain their branding sometimes carry some tie to their parent company, long-term maintenance of several different brands can be challenging, Woodward continued. If a buyer wishes to bring a cohesive story to market, he claimed brand retirement is usually the best option.

Yet the risk lies in losing the very heart of the company purchased in the first place, which is why, said Gambotto, preserving culture is so essential in any post-deal integration. While a brand name may be important to the founders – or their egos – customers are likely to care less, believes Lester. 

“It depends on how well-known or established the organisation is – does the trust in the product or service come from the people or the business?”, he said.

“If It’s the people then surely the brand is largely irrelevant, as customers will gravitate to those delivering the service or product regardless of whom they work for. An acquirer should look to understand the brand in their marketplace through market research and evaluate the benefits/risk associated with changes.” 

For Verma, the brand name carries little importance in the grand scheme of a successful post-acquisition integration.  

“A part of decision-making is to let the greater good prevail and not have the affinity to stick to what is familiar,” he said. “Rather than being brand-sensitive, we should consider what is best for the 'new' business. What we need to ask is: ‘Which company has the strongest brand?' and move forward from there.” 

And as Moran believes, deciding on M&A rather than maintaining independence is a difficult choice, but the former usually is the winning choice. 

"With M&A comes opportunity but it is often unsettling to a growing business and its existing clients and teams so often the benefits are far outweighed down the track by impacts on existing client and employee satisfaction," he said. "You certainly learn from every M&A."