Sources: Billion-Dollar Solution Provider Forsythe Is Up For Sale

Forsythe Technology, a $1 billion solution provider behemoth which has made significant investments in building out its business over the past several years, is up for sale, according to sources close to the company.

Forsythe has hired an investment bank and is actively shopping the 100 percent employee-owned company, said one source with ties to the investment banking community. The source said the company is an attractive target for the right buyer looking to capitalize on the broad portfolio that Skokie, Ill.-based Forsythe – No. 37 on the 2017 CRN Solution Provider 500– has built out over the past several years.

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"With the right buyer, there are a lot of costs that can be taken out," the source said. "There are a lot of investments that Forsythe has made that are really expensive. What buyers are going to be looking at is: Are those investments yielding a timely return?"

Forsythe's status as an employee-owned business has made for a more benevolent structure than competitors in the public market such as Presidio, No. 21 on the CRN SP500, and ePlus Technology, No. 35 on the CRN SP500, sources said. That has provided Forsythe with broader latitude in making a wide range of investments aimed at growing the business, sources said.

"It gives you a lot of flexibility," said the source of the employee-owned structure. "You don't have the pressure from shareholders and private equity. It is a more casual, relaxed model."

Forsythe, in fact, has bought 10 companies since 2001 and in 2015 launched both its Meta7 Division to deliver Oracle consulting and integration services and its Hosting Solutions Division.

Forsythe also has a data center business. The company broke ground on a $130 million data center facility in Elk Grove Village, Illi., in 2014, opened Forsythe Data Centers in spring 2015 and then sold the real estate last August to T5 Data Centers and leased back the space.

In a written response to CRN on whether the company has been put up for sale, Forsythe said: "We don’t confirm or deny rumors. We've had very strong results this year across all lines of business. Our hosting solutions revenue under contract is up double digits for the third year since we launched the business. Our professional services business is up double digits as well, and our product business is also up. We remain focused on continued investment and growth. We see great opportunities going forward."

Forsythe – whose sales have remained stable at about $1.1 billion for the last four years- - said it has been profitable for 46 consecutive years with double-digit operating earnings in 2016. What's more, Forsythe said its Dec. 31, 2016, share price valuation was the highest in its history: 12 percent above the 2012 evaluation.

The company – which has 1,000 employees including 500 engineers and consultants with 2,500 certifications – has notched an impressive 40-plus Partner of the Year awards including a Red Hat Innovation Partner of the Year award in 2017, and several Oracle and Cisco partner awards in 2016.

Furthermore, Forsythe was just named for the second consecutive year as one of the top consulting firms in IT strategy by Forbes magazine.

Forsythe is in the midst of an aggressive buildout of its managed services offerings. Already this year the company has launched a multicloud private storage offering and a security incident and event management (SIEM)-as-a-Service offering with additional services in development.

Competitors said the potential sale of Forsythe comes with continued robust merger and acquisition activity in the channel along with increased margin pressure in the once-lucrative on-premises enterprise data center market.

A top executive for a national solution provider, who did not want to be identified, confirmed that Forsythe has been exploring the sale of the company. "With the hosting stuff, they were competing against Rackspace, Datapipe and others. I am not sure that was the way to go," said the executive. "At the same time, you are not going to be selling tons of servers and storage like you used to. People are still going to buy on-premises product but just not at the clip that they used to. It is changing."

The CEO of a large Northeast solution provider, who competes against Forsythe in the midmarket, said solution provider behemoths like Forsythe are facing significant margin pressure in the enterprise market. "They've always gone after larger accounts, and the margin pressure is even higher at the high end," said the executive.

Forsythe will face intense scrutiny on its balance sheet and cost structure from potential buyers, said a top executive for a large national solution provider. "People are going to be looking at the books closely," said the executive.

That scrutiny on profitability is only natural, solution provider executives said, in the wake of legal claims earlier this year by PCM that En Pointe Technologies, which PCM acquired in 2015, had materially overstated the profitability of its business.

Among the channel deals completed this year are $5.4 billion Insight Enterprises' $258 million acquisition of Eden Prairie, Minn.-based Datalink (No. 45 on the 2016 CRN SP500) with $770 million in sales; solution provider HTC Global Services' $90.7 million auction acquisition of the U.S. and India operations of Ciber (No. 43 on the CRN 2017 SP500); private equity behemoth Apollo Global Management's acquisition of telecom service provider West Corp. for $5.1 billion and the merger of Novitex and SourceHOV in a $2.8 billion deal,

One of the biggest issues potential Forsythe acquirers will have to confront are cultural related to the 100 percent employee-owned structure, sources said. "The ownership structure is unique," said one source. "Most companies in the channel are owned by founders, large shareholders or private equity. They are firmly focused on returns."

The net assets in the Forsythe Technology Inc. Employees Stock Ownership Plan (ESOP) – which the company stressed does not directly reflect the company's performance – has decreased by 14 percent from 2012 to 2015, according to figures from Brightscope.com,which provides data on 401K and employee stock ownership plans.

In 2015, the Forsythe employee stock ownership plan had net assets of $106 billion with 849 active participants compared with $123.58 billion with 881 active participants in 2012, according to Brightscope.com.

During the years 2012 to 2015, Forsythe said it experienced a large number of repurchase obligations in the employee stock ownership plan. Furthermore, the company pointed out that "there are many things that impact the change in total assets" in the ESOP Trust, including share value, retirements, employee departures, and required early diversification under the Employee Retirement Income Security Act (ERISA) of 1974.

The CEO of a large national solution provider, who has had experience in 100 percent employee-owned acquisitions, said there is often a cultural divide between the employees and the acquiring company. "The interests of the constituencies aren't always 100 percent aligned," said the executive. "The money people running the business see things differently than the employees. The financial players are looking for returns."

One CEO of a large national solution provider, who did not want to be identified, said he sees more and more companies struggling to make the transition from the product-centric on-premises data center model to the cloud services model. "The pace and change of evolution is moving very fast," said the executive. "The product business is off for a lot of companies. It's getting tougher and tougher."