Insight Enterprises to acquire PCM
Wednesday, June 26 2019
Insight Enterprises (Insight) has announced its plan to buy rival reseller PCM. The price offered is US$35 per share, valuing the business at approximately US$581 million. This represents Insight’s largest acquisition, surpassing its 2016 purchase of Datalink. It has reported better-than-expected cost savings from that acquisition, leading it to look for a bigger purchase. At its core, this is a simple acquisition representing a trend that Canalys has long highlighted and which will continue to be inevitable: volume channel partners will use acquisitions to grow.
Insight chases North American leadership
For Insight, this acquisition is largely about increasing its position in the North American market. PCM fills two needs in its portfolio: the midmarket and Canada. In the case of Canada, Insight estimates it will become the third largest reseller in the market and highlighted that it would attain Cisco Gold status in the country on the back of combined volume shipments. In the much larger US market, where both companies have their core businesses, Insight would reaffirm its position as the fourth largest commercial reseller by product revenue, but still trail CDW, WWT and SHI. Insight also gains a company that has been steadily increasing its gross margin (an impressive feat given it has been integrating its own acquisitions) and moreover provides a more favorable margin mix than Insight currently generates. Should it achieve or exceed planned cost savings on the back of the acquisition, Insight will hope to improve its gross margin profile, which currently trails that of its major direct competitors. Outside of North America, the deal will have a limited impact. PCM has a tiny (but fast-growing) UK operation. This will remove a minor competitive irritant for Insight in the UK, where Insight is already one of the leading channel players, and eliminate the potential threat of PCM making a bigger play for Europe.
Insight won’t gain any particular vendor relationships of significance with the acquisition, given its broad portfolio breadth; rather, their top vendor suppliers completely overlap (Apple, Cisco, Dell, HP, HPE, Lenovo and Microsoft). HP is likely to be the most affected of these suppliers – Insight now closely battles SHI to become HP’s second largest commercial partner in the US after CDW, based on Canalys estimates.
Insight has been increasing its services mix and developing its digital capabilities, as highlighted by its previous acquisition of Cardinal Solutions, a digital consulting agency. It is pursuing a strategy around four distinct business areas: digital innovation, connected workforce, cloud and data center transformation, and supply chain optimization (using its size to offer customers cost-effective purchasing of hardware and software). But the acquisition of PCM appears to be more of a reversion to the norm within its true comfort zone of product resell, and most closely linked to the last of those four areas. Using its size is an important strategy that Insight remains committed to. This deal also comes on the back of a weak product performance for Insight in Q1 in North America, when its product business declined on the back of reduced hardware spend by a major customer. This may have accelerated Insight’s desire to quickly increase market share through acquisition.
Vendors remain trapped by their program structures
It should come as no surprise that these large acquisitions keep happening in the channel. This latest announcement follows a long list of in-channel mergers and acquisitions over the last three years. Just a few notable examples affecting the US market include CDW-Kelway, Computacenter-FusionStorm, Getronics-Pomeroy, Insight-Datalink, PCM-En Pointe Technologies, PCM-Systemax, Sirius-Forsythe, SoftwareOne-Comparex, Synnex-Westcon Americas and Tech Data-Avnet.
Vendors play an unwilling role in this cycle. Most partner programs are revenue-driven, with better incentives offered to larger partners. It is notable that Insight highlighted its Canadian Gold status as a benefit from this acquisition – for these partners the incremental margins, as well as preferential support, are a tangible advantage to consolidation.
It is a hard reality for vendors to avoid, but this latest acquisition may ultimately serve to create a better balance in the ecosystem, at least in the short term. Vendors need an efficient channel with the right degree of equity across the major players. Single-player markets are bigger threats to vendors and there is a risk that CDW is getting too powerful, especially in certain sectors. A larger threat still is Amazon disrupting the entire ecosystem, taking negotiating power completely out of the vendors’ hands. Larger resellers can aim to combat the Amazon threat by improving efficiencies in their own supply chains by using better technologies (both Insight and PCM are in the midst of SAP implementations), while maintaining product expertise that Amazon does not possess.
Insight-PCM restores some equilibrium in the US channel. It solidifies a big four in the US – with PCM, Insight will generate more than US$5 billion in IT product revenue annually, though it still trails the top three by some margin. The acquisition also creates a credible challenger to CDW in the midmarket, given WWT’s and SHI’s focus on larger enterprises. But many vendors will go back to the drawing board when assessing their channel strategies. The national resellers are becoming too important to vendor shipments, yet incremental growth through these channels is difficult. Larger volume vendors (Apple, Cisco, Dell, HP, HPE, Lenovo and Microsoft) need to invest in robust integration and automation to be as efficient with these partners as possible. Smaller vendors, meanwhile, should consider a two-pronged approach. First, they should use alliance relationships with the larger vendors to tap into their established partnerships with the national resellers. Second, they should focus on internal advocate-type programs – individuals that can foster the relationships from the inside. The larger these partners become, the more marketing needs to be done internally to gain awareness across the large salesforces. In the newly combined Insight-PCM company alone, that salesforce will number nearly 8,000 individuals.
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