Channel surprised but not shocked by 2e2 collapse

Trade creditors thought to be hit to tune of up to £30m following collapse of channel powerhouse

Onlookers have expressed their surprise and sadness at the collapse of 2e2.

It was announced last night that 2e2 has called in FTI Consulting to handle the administration of 10 of its UK subsidiaries after it was unable to secure new funding.

According to sources, the integrator may have left behind it unsecured trade debts of between £20m and £30m, with some individual distributors thought to have been hit for as much as £5m.

2e2 is also known to have at least attempted to transact with fellow VARs in its final days as distributors ran for cover, while a couple of the big vendors may also be in for a substantial sum.

Alex Teh, managing director of distributor Vigil Software, said his firm had avoided the carnage after first observing "strange payment behaviour" from 2e2 18 months ago.

"Because it had a few key customers for us, we decided to stop providing them with credit on deals eight months ago," he said, adding that Vigil had traded with 2e2 on a pro forma basis only since then.

"I feel quite sad as it had bought some big UK names, such as Morse and Netstore, which were good resellers," he said.

Graeme Watt, president of distributor Avnet Technology Solutions EMEA (pictured), said: "I know the business and some of the key management team. It is very regrettable but [administration] was always one of a number of likely outcomes, so I am disappointed and surprised, but not overly shocked."

It is only two weeks since 2e2 brought in two new top executives, presumably in a last-gasp effort to secure funding, and Mike Norris, chief executive of Computacenter, admitted he was surprised by the speed of his rival's collpase.

"But I'm not surprised they are where they are," he added, "as it had a lot of debt".

"You cannot buy greatness, you have to build it"

Backed by VC house Duke Street Capital, 2e2 made a string of acquisitions last decade including Compel, Netstore and Morse, taking it from zero to £400m sales in the space of eight years. But the acquisition run left the integrator with huge debts on its books, leading to interest repayments in 2011 alone of £20.8m.

Norris said: "This proves categorically that you cannot build a solid, reliable business in this industry by acquisition alone. You have to grow a business with its own culture.

"But I think this is more good news than bad news for the industry. It shows that this industry is still more about ROI and making a profit and thinking about the long term, rather than some sort of deal-driven, get-rich-quick scenario. I think it is good overall that you have to build your way to greatness, not buy your way to greatness."

Phil Doye, chief executive of Kelway (pictured, left), said a distinction should be drawn between highly leveraged private equity-backed VARs such as 2e2 and those that are more self-sufficient, such as Kelway.

"2e2 was a business that I admired and it is sad that it has ended this way especially as there are a lot of very good people there. The burden of debt they carried was always going to be difficult to manage regardless of how well the business performed," he said.

"There will no doubt be much debate over the merits of private equity and buy-and-build strategies. However, like many things it is not clear cut. Kelway has proved it can be done with minimal debt and in a way that brings tremendous value to both the customers and staff of the acquired companies. Softcat have set the marker for exclusively organic growth so there is no right answer."

Who wants a piece?

FTI has said it is "exploring options" for the UK business but opinion is divided on whether it will look to sell the entire outfit or break it up.

Watt said: "The administrator's first priority will be to keep the business going as a going concern. They will look at completing the refinancing that 2e2 was not able to do itself or sell the business in part or whole."

In 2010, 2e2 formed a strategic partnership with O2 and Eddie Pacey, managing director of EP Credit Management & Consultancy, said the carrier may be interested in at least parts of the firm.

"It would make sense for O2 to buy the UC business given their joint venture," he said.

Norris (pictured) said Computacenter is watching the situation with interest.

"I am sure a lot of people will be interested in taking a look but it depends on how the process pans out," he said. "In my experience, speed of execution is high on the list so it will depend on what can get done the quickest. If someone steps in and says we want to take it all on, I am sure they would be delighted, but if it took six weeks to organise financing, then no chance."

Jonathan Lassman, managing director of security VAR NTS, said 2e2 had suffered because it had lost the personal touch.

"We want to offer a lifeline to all their sales staff. Come and talk to us as we are looking to recruit," he said.

CRN was still awaiting comment from FTI as this story was published.