M&A activity in the distribution tech sector heats up

Consolidation isn't limited to industrial distributors—even distribution software providers are getting in on the game

By Brad Perriello, Associate Editor -- Industrial Distribution, 9/1/2007 6:00:00 AM

Consolidation in the industrial distribution sector has been moving at a rapid pace recently, with regional distributors such as NESCO joining huge players like Wolseley and HD Supply on the acquisition trail.

The trend is not limited to pure distribution entities—even the software providers that serve them have been getting in on the act.

Witness Activant Solutions Inc.'s $100 million purchase in July of competitor Intuit Eclipse's Distribution Management Solutions business.

Steve Bieszczat, vice president of marketing services for Activant, says the company had its eye on Intuit Eclipse for some time prior to the acquisition.

“The thing that pushed us kind of over the edge was the commonality of purpose and culture. It was just such a good fit,” Bieszczat told INDUSTRIAL DISTRIBUTION. “It was one of those things where the sum was going to be so much more valuable than the two parts.”

Intuit Eclipse's customers can expect the company to continue to service its products for the immediate future, he adds.

“In the midterm there's going to be a broader menu of products and service. Near term it's business as usual,” Bieszczat says. “We have to complete the integration of the two companies. Then we're going to release our supply chain initiatives and let [people] know what direction we're going to go.”

But as the largest players keep getting bigger, will there be any room left for smaller, niche players?

Yes, says Activant senior vice president Steve McLaughlin, general manager of the company's Wholesale Distribution Group.

“There are players in each of those verticals that we're in, that are anywhere from $3 million to $10 million or $12 million-a-year companies, that are, in many cases, exclusive to that vertical,” McLaughlin notes. “Those guys are still out there. They're still competing in a very ferocious and fierce manner and I don't expect that to change. It's not just guys that might be doing a beer truck routing. There are legitimate ERP providers in every vertical that are going to continue to be out there.”

Steve Epner, founder and CEO of the Brown Smith Wallace Consulting Group, agrees, citing the agility of smaller competitors as a major advantage.

“What happens when you get all these behemoths chasing each other, I think there's always room for a smaller player to come in and say, 'Do you want to be doing business with these giants?'” says Epner, whose firm focuses on distribution software and technology. “There's always room for the nimble entrepreneur that's going to go out there and come up with a killer application that everyone is going to want to duplicate.

“Is it going to be hard to compete? Absolutely. But we have some risk takers in this country and those things can take off all of a sudden. … Will some of those little guys get bought up? Hell yeah, and that's what they're hoping [for].”

And don't discount the impact of IBM, SAP or Oracle'sNetSuite division, whose footprints in the distribution sector might be smaller than Activant's or Infor's, but who could be poised for bigger things.

“Watch out. These guys are out there and they know how to market. If they play their cards right, they're going to be big competitors too,” Epner says.

Providers such as Microsoft and Sage Software and their basic business packages represent a huge opportunity for smaller developers, he adds.

“There are a number of companies now where you can buy into their base 'shrink-wrapped' accounting package and then all a niche player has to do is put together the code that makes them distribution-centric. Now my cost to get into business is a fraction of what it used to be, because I don't have to develop all that other stuff,” Epner notes. “When somebody wants to focus on doing one element very well, they can do that better than someone looking to put 415 different functions into an ERP package.”

That's the strategy for Rubber Tree Systems, an independent software provider that began as a spinoff of Binkelman Corp., a Toledo, Ohio-based industrial rubber and power transmission distributor.

Rubber Tree specializes in software that links distributor sales reps' mobile PDA devices with their companies' central ERP systems, says president Brian Kazmierczak. Rather than posing a disadvantage, the company's relatively small size lets it get to market more quickly than larger entities.

“Risk, innovation and agility are something the larger companies don't tend to have. At smaller companies those three main factors lead to [bringing] new ideas, products and services [to market] in minimal time because the central focus is on our core business,” Kazmierczak says. “Innovation is key at our spot [in the market] because our unique user interface was designed specifically for salespeople in industrial distribution . It's not designed for a pharmaceuticals salesman or any other type of sales.”

As for consolidation in the distribution software sector, Kazmierczak agrees there will always be room for small and nimble firms like his.

“Distribution has kind of always been a little behind the curve as far as software. In the last five to 10 years there's been a giant growth in spend in these distribution companies, and obviously that's going to attract the attention of a lot of investors,” he says. “Each form of distribution is similar, but it's also totally different. One $5 million bearings distributor's activities are different from another $5 million bearings distributor's.

“You're going to see companies that won't accept the constraints of the vanilla ERP systems out there. It's just going to be a constant trend of larger companies gobbling up smaller companies, but smaller companies are going to keep popping up.”