PCM Wednesday said it is buying the $800 million North American business to business assets of Systemax in a deal that drastically reshapes the balance of power in the solution provider market.
The deal pushes PCM, which earlier this year acquired $393 million solution provider En Pointe and $111 million Canadian MSP Acrodex, into the top 20 ranks of the CRN Solution Provider 500, surpassing PC Connection, which posted $2.46 billion in annual sales in 2014.
“This continues the transformation of PCM into a much larger, more diversified business integrator,” said Martin Wolf, president of martin wolf M&A Advisors, Walnut Creek, Calif., which advised Systemax in the deal. “It is a transformational deal for them. It enhances their value, opening the door for them to sell more services to the Systemax customers.” Under the terms of the deal, PCM will pay $14 million for certain B2B assets of Systemax’s North American Technology Group including the coveted Tiger Direct brand, a longtime direct marketer of IT products. The deal is expected to close by Dec.1. Systemax reported North American B2B business sales of $800 million in 2014.
The deal opens the door for PCM to hire approximately 400 Systemax B2B sales reps across the U.S. and Canada. It also gives PCM the rights to the Systemax North American Technology Group’s B2B customer list and vendor contracts, trademarks and other intellectual property rights. Once the deal is finalized, the two companies will enter into a “transition services” pact to facilitate an orderly transition of the Systemax assets.
PCM said the deal will significantly expand its footprint in SMB market as well as the education and public sector markets. “After we absorb the costs of bringing on this sales team, we expect their performance to ramp during 2016, and we expect the acquisition to contribute nicely to our revenue and to be meaningfully accretive to our 2016 bottom-line operating results beginning in the second quarter,” said PCM CEO Frank Khulusi in a prepared statement. “We should be able to give more color on these wonderful prospects as we integrate this acquisition.”
One channel executive, who did not want to be identified, called the acquisition a gutsy move by Khulusi, who has beefed up the PCM management team as part of an all-out high-margin services offensive. “If Frank and the PCM team can execute on this they are going to do very, very well,” he said.
PCM is in the midst of being transformed into a top-line aggressive full-service IT solution provider with a much bigger platform and footprint. The deal provides El Segundo, Calif. based PCM, currently No. 29 on the CRN SP500, with the scale to drive significant gains in its operating model, potentially putting pressure on a wide range of solution providers including privately held players like Fusion Storm and Trace3 on to the billion-dollar- plus publicly held players like e Plus and Pivot and even PC Connection.
“End users, like OEMs, are looking for fewer, deeper relationships and scale matters in a world where you can leverage fixed expenses,” said Wolf. “CDW proves that every day. They have industry-leading growth, margin and profitability. They continue to be the 800-pound gorilla. But there is clearly room for more competition.” Wolf sees the Systemax North American business as a noncore asset that can be kicked into high gear by PCM. “To the extent they can normalize and improve the performance of this business, it will be a great deal for them,” he said.
The deal comes seven months after PCM acquired En Pointe, No. 42 on the CRN SP500, one of Microsoft’s largest Licensing Solution Providers in the country, and just 19 days after PCM acquired Edmonton, Alberta-based Acrodex, No. 92 on the CRN SP500, also a highly respected Microsoft LSP.
PCM has launched a drive into higher-margin services over the last year under the leadership of a beefed-up management team. The executive additions started one year ago with the hiring of of former Ingram Micro executive Jay Miley as president, a position previously held by Khulusi.
Just last month the company made yet another high-profile move by snagging an executive with two decades of experience at Cisco and Hewlett-Packard, Alan Lawrence, to lead the public sector organization. At that time, PCM said Lawrence will be tasked with accelerating growth of the company’s government, education and health-care businesses.
Port Washington, N.Y.-based Systemax, No. 19 on the CRN SP500, is in the midst of a major realignment refocusing the business around its B2B solutions in North America. In March the company dropped nearly all its retail business. In the most recent quarter, the company posted a loss of $10.3 million on an 18 percent drop in sales to $825.4 million.
“We believe PCM is a natural fit for our B2B employees and their customers,” said Systemax Chairman and CEO Richard Leeds. “Moving forward, this will allow us to devote all of our time and resources on our other businesses and improve their competitive position to capitalize on their growth opportunities.”
Systemax will close its three remaining retail stores and its North America Technology Group distribution center, and after the sale is completed will completely exit its remaining North America Technology Group operations.