In recent weeks, I have been writing (here and here) about the soon to happen collision of VAD and Master Agency? Well it happened on Friday night.
ScanSource is a $3.2 Billion dollar distributor of hardware and software. (A much smaller Ingram or Tech Data which bring in $30-40B in revenue annually). In 2013, ScanSource partnered with Intelisys at the same time that Tech Data partnered with Microcorp. Friday ScanSource decided to buy Intelisys for at least $83.6 Million dollars plus earn out.
"Under the agreement, the all-cash transaction includes an initial purchase price of approximately $83.6 million (in cash), plus earn-out payments based on earnings before interest expense, taxes, depreciation and amortization (EBITDA) over the next four years. Intelisys has demonstrated double-digit growth of net revenues and EBITDA, which is projected to continue during the four-year earn-out period. For the first full year after closing, Intelisys' net revenues, which reflect gross commissions less payments to sub-agents, are estimated to total over $34 million with a 45% to 50% estimated EBITDA margin." [source]
According to the SEC Filing, "The total earn-out payments are estimated to be in the range of $100 million to $150 million, depending on the performance of the business." At $17M, that is a long payout for ScanSource - about 10 years!!!
"Founded in 1994 and based in Petaluma, California, Intelisys operates in the United States and has approximately 120 employees, more than 130 supplier partners, and over 2,400 sales partners." Those 120 employees are all staying on (at least during the earn out period).
For ScanSource this is their pivot to MRR (monthly recurring revenue). As box sales have slowed - and ScanSource had to lower its financial estimates for the year - the VAD had to figure out how to get MRR going. It was already working with Intelisys - and at $100M+ in commissions it was a number that the Street wouldn't blink about. Hence, the deal.
Also, hence the M&A in the VAR-MSP-Master AGent space. Inorganic growth is faster than organic. Everyone wants to beef up. (Insert Olympic steroid jokes here.) These worlds are colliding. More VADs will buy into MRR. More MSPs and VARs will have to shift to MRR.
Will partners start drifting to one VAD over another due to these mergers? Does TD or Ingram lose box sales to ScanSource over this? Not likely. Most partners - agents or VARs - have multiple suppliers for fear of having too many eggs in one basket. It is for that reason we see the rather large numbers of partners under a master or VAD. If you can hold a pen.... but only a small percentage actually get a monthly commission check.
UPDATE:
Joe Panettieri has some details on Channele2e HERE and HERE and THERE.
