This week’s announcement of the merger between EnQii Holdings and Minicom Digital SIgnage (MDS) created a bit of a stir, even if it was not unexpected. Yet the noise level was lower than one would have guessed it would be. The usual rumblings about consolidation were buttressed by buzz-laden quotes in the official press release touting verticality, synergy and additional acquisitions. A few people asked me what I thought it meant, and I had to sleep on that one… twice. I have a few thoughts, but let me begin by congratulating all the parties on closing the deal and to wish them good luck. It isn’t easy to pull something like this off, and it is even harder when the primary shareholders on both sides are venture capitalists. So getting it done was likely a feat in and of itself. The rest of us are left to ponder how it came about and what it all means. In the end, it looks like a financial deal with some actual synergies, but it’s not industry-altering. The lack of comments on other blogs would seem to confirm that.
Few people were shocked that an EnQii deal went down, as it was fairly common knowledge that the company (or perhaps its North American business) was being actively shopped in recent months. The reasons for that are not known to outsiders, a group of which I am certainly a member, but one can guess that the VC backers were getting itchy about getting some money off the table. Whether that reflects a bullish or bearish outlook is also unknowable. But the fact remains, the Board wanted a deal done. MDS, whose business is aptly described by DailyDOOH’s Adrian Cotterill as “having a very high profile in the industry and a global reach but bottom line doing little more than selling some cable adaptors and switching equipment,” needed to expand its portfolio in order to truly have the “DS” in its name have some meaning. A software solution would seem to fit that bill. Whether EnQii will bring new deals to their MDS brethren or vice versa remains to be seen. Personal experience would tell me that a software company can certainly provide leads and referrals for a hardware supplier, but it seldom works the other way around. That is just the way the decision cycle works: companies don’t lock in on connectors and then search for software. Some of that can be solved by adapting the way one goes to market, and I assume the capable people at both firms will figure it out.
While the deal is presented as a “merger of equals”, the outward signs indicate that the MDS folks are driving the bus. Jerusalem Venture Partners, who were key investors in MDS, led the round that sealed the deal. Another MDS VC investor and EnQii’s two primary VC investors were characterized as “participating” in the new round. From the outside, that sounds like a merger and a recapitalization, with new money invested proportionately to ensure that the desired post-deal ownership shares came out a certain way. Given JVP’s lead role, the Board chair going to Shlomo Nimrodi and the CFO role staying in Israel, it sure sounds like the shots are being called from Jerusalem based upon ownership leverage.
Is it a match made in heaven? Dave Haynes of Sixteen:Nine opined that he’d “rather see complementary skills put together than two rival software development teams“. That is one view. I take a somewhat different view, which is that a combination of solution providers and their customer bases might have been more meaningful in the larger picture. Yes, the rationalization of the technology stacks and development teams can be a long process, but it has been done before in the software business, and as long as there is a clear plan it can be done again. Those deals are dicey as well, but when done, they can be very dynamic. I witnessed it many times in the retail solution space. A chance to radically alter the balance of power on the solution side by way of acquisition appears to have passed for EnQii, even if temporarily. It may be that there were no viable software partners for them to merge with for a variety of reasons, and I don’t take the existence of the ongoing acquisition fund as a sign that it will be used horizontally. Rather, the words in the press release seem to indicate a more vertical bias to the strategy. There are some good folks on both sides of this deal, and I wish them well.
It is always exciting when deals get done inside the industry. It means progress is being made, strategies are being formed, and new money is being invested. Sometimes it means that investors are antsy. EnQii was a fairly high profile player in the solution space and the merger seems to reflect a willingness by their Board to let their destiny be determined in large part by folks with a vertical view. In the grand scheme, the software side will be sufficiently funded to go after whatever strategy they get approved, and will likely go about their business after the dust settles. This was not a consolidation as much as it was a merger and recapitalization. I don’t think it will alter competitive strategies very much (if at all), or kick off a round of “me too” deals. The industry-altering deals will happen when the big money steps up to the table and places some bets.
Those limos may be pulling up to the casino soon. The night is young.