Challenging market conditions, changing vendor models, a need to drive economies of scale, as well as a lack of growth opportunities will see the consolidation trend in the distribution sector accelerate next year.
Market talk is already making the rounds, prompting speculation that there are deals on the table.
However, as the top tier has already made its move, any acquisitive activity is likely to come from outside the sector, privately-owned players, or involve smaller channel companies being swallowed.
Has to happen
Independent analyst Paul Booth says the sector is now in a position that will force consolidation as there is no room to grow in the local market, and margins are under pressure. He believes the trend already evidenced in 2013 will accelerate.
Recent moves among the top five largest channel companies include MB Technologies' bid for SecureData, while Westcon has wrapped up its purchase of Comztek.
In addition, Pinnacle Technology bought almost 35% of Datacentrix in a more than R200 million deal, at mid-year. Pinnacle's move was prompted by its desire to work out if there is potential to create a working relationship in the future, as it seeks to move up the IT value chain.
Uwe Brandkamp, regional sales director at Westcon-Comztek, says consolidation will continue next year as there is a lack of available capital and credit. He adds vendors will look for bigger consolidated partners to give them muscle in local markets, as well as a mechanism to grow north of the border.
Brandkamp believes the idea of companies being a "small player in a large pond" will push some of the consolidation, especially when it comes to achieving economies of scale and being able to add value to distribution.
Craig Brunsden, executive of software and enterprise at AxizWorkgroup, says consolidation in the sector is inevitable, because changing vendor models and market pressures are forcing channel players to align closer together and take costs out of the supply chain.
Booth explains a number of international principles are moving away from exclusive distributor models. This, he says, will place pressure on companies to grow because they are no longer the only ones offering certain products.
Brunsden says one of the quickest ways to extract expenses in a flat or declining market is to consolidate and leverage common functions and systems. In addition, he notes, players are looking for opportunities to grow into new areas, and acquisitions have proven to be a successful play rather than organic investment in new technologies or regions.
Takeover targets
Booth notes the large players are "certainly not going to eat each other".
Brunsden says the existing trend is likely to continue, although most of the big deals have been wrapped up, so he does not expect many surprises in 2014. He anticipates the big announcements to come from the value-added reseller and reseller part of the channel, and involve companies such as Business Connexion and EOH.
Business Connexion CEO Benjamin Mophatlane has already indicated the company is looking for niche acquisitions, especially in Nigeria, as it seeks to increase its presence in the West African country. He adds the industry will go through consolidation, especially as it faces margin pressure and growth in cloud services.
EOH's growth strategy also includes buying smaller companies to add to its portfolio and bolster organic growth.
Booth says if the channel wants to grow, it will have to look at acquisitions, which could come from outside the distribution market. He adds other targets could come from the mid-tier segment, with companies such as Esquire, First Distribution and Phoenix Distribution.
Brandkamp says based on market talk, there may be some deals on the table. "I believe some of the bigger privately-owned companies, as well as smaller niche players that can bring new lucrative markets or technologies to bigger players, will be targets for consolidation."
Tie-ups between channel partners and distributors will be watched with interest by the market, says Brandkamp. However, he is unsure how much of that action will be seen in 2014 and 2015.
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