Low cost, but little long-term value: Insight Enterprises’ plan to acquire PCM Inc.

Insight’s acquisition strategy has led to strong services growth and a successful shift from the legacy VAR model

Insight’s last three acquisitions, of Cardinal Solutions, Ignia and BlueMetal, were all services companies that provided significant differentiation and skilled talent that legacy Insight lacked. The acquisitions were part of the firm’s 2015 digital innovation strategy, an attempt to shift its business model from a typical VAR to a true solutions and services provider. That strategy was largely successful, and Insight’s growth in services (greater than 18% year-to-year for the last five quarters) has outstripped nearly all of the firm’s major competitors, including CDW (Nasdaq: CDW), SHI and Connection (Nasdaq: CNXN). In January 2019 Insight announced the formation of a new practice called Insight Digital Innovation, which unites those three acquisitions under one umbrella, allowing Insight to deploy its 850 developers and architects on new IP and services engagements in a streamlined fashion. TBR believes Insight has been executing its digital innovation strategy extremely well, and the decision to invest in services and more highly skilled employees has been a key differentiator for Insight. Though the company’s overall top line has decreased year-to-year in recent quarters, this is due entirely to declines in product sales, which also face particularly difficult compares from a strong 2017-2018. Insight’s extremely robust double-digit growth in services revenue positions the firm to return to growth in 2H19 to deliver midsingle-digit overall growth for the year. TBR believes the firm’s pivot from its legacy business model is an example for other VARs to follow to combat the continual commoditization of hardware and software.

PCM represents a retreat to scale and a regression for Insight

Even considering Insight’s success in shifting away from its legacy model, the company’s plan to acquire PCM does make some immediate sense. Adding scale can be of significant value in a marketplace dependent upon volume selling, and Insight’s leadership touts PCM’s penetration in the small to midmarket segment, where they believe there is opportunity to upsell Insight’s higher-margin services offerings and in which legacy Insight has very little market share. Essentially, Insight is attempting to buy customers in hopes of increasing stickiness with those clients and continuing its services growth in a new market. Beyond its customer base, PCM has largely done nothing to adapt to the changing marketplace that VARs now face and seems to offer little in the way of differentiation. TBR believes purchasing customers is a dubious strategy at best, as PCM has been consistently declining in revenue over the last two years, indicating stickiness is already an issue with its customer base, and being acquired is likely going to send many employees out the door. Undoubtedly, many of PCM’s customers are loyal to the company due to their relationships with current PCM employees — if those employees become redundant or decide to leave PCM as it joins Insight, many of those customers may choose to follow them.

TBR believes the main benefactor of this planned acquisition is likely to be limited to the organization’s supply chain, given the likely increase in scale and efficiency, as well as the addition of about 1,100 highly skilled services and technical employees. Another interesting piece of this planned acquisition is PCM’s cloud hosting business, which seems to be one of the only offerings from PCM that is not matched by most every other VAR. However, in a special conference call regarding this planned purchase, Insight CEO Kenneth T. Lamneck indicated the cloud hosting business is going to get a very close look to determine if it will remain part of Insight once the acquisition is finalized. Though PCM’s cloud hosting business is relatively small, it seems more likely to provide growth than many other parts of PCM’s business and would allow for more opportunity to bundle additional higher-margin services and solutions. Ultimately, fully capitalizing on what PCM has to offer will be a difficult proposition for Insight considering the typical effects of such a large acquisition and Insight’s apparent strategy for growth.

In June Insight Enterprises (Nasdaq: NSIT) announced plans to acquire PCM Inc. (Nasdaq: PCMI) for around $581 million in June, a deal that would add about $2.2 billion to Insight’s revenue, with about $1.6 billion coming from small to midmarket clients and $260 million coming from the public sector. The planned acquisition appears to be aimed at gaining market share with small to midmarket companies, a segment which Insight historically has not had much success growing organically. PCM also has 40 offices and just over 4,000 employees, which would give Insight a significant boon in terms of scale for both product delivery and sales. However, with 2,700 of those 4,000 employees currently in client-facing roles, TBR notes there are a number of redundancies in locations and employees across the two firms.