One of the Canada’s largest solutions providers is separating its VAR business from the $60-million firm’s managed services operations in hopes of boosting its revenues and share price.
OnX Enterprise Solutions Inc. of Markham, Ont., plans to sell its hardware, software and infrastructure solutions business to CEO Sheldon Pollack and president Phil DeLeon for $6.8 million, who will keep that business privately-owned while continuing to run the public company.
“The VAR business is a wonderful organization, does very well, and so does the other side,” Pollack said Thursday. “Unfortunately the public markets don’t particularly like VAR businesses and they’re putting a discount on our stock. So we’re turning the company into a pure-play Internet outsourcing company and taking the VAR business and privatizing that.”
“We need a high stock price. As long as we were trading as a hardware VAR it made it very difficult for us.”
The problem is that revenues of the company as it now stands are basically flat. In its last fiscal year, which ended April 30, OnX had revenue of $61.9 million, compared to $60.2 million the previous year.
Shares traded today at 18 cents, only three cents above where they were 12 months ago.
While the VAR side generated about $45 million in revenue in the past year and the managed services side pulled in about $15 million, it’s the latter business that has the growth and larger margins.
Pollack said the Internet business had margins of roughly 35 to 40 per cent. Hardware margins from the sale of IBM, Hewlett-Packard, Cisco Systems and Sun Microsystems gear alone in the VAR business are less than 15 per cent, he said. While margins from its services business were double that, most of the VAR side’s revenues came from hardware sales.
“Capital markets like high margins, high growth and predictable revenue streams,” said Pollack. “The truth is that although we have a best-in-class VAR business, it tends to be (with) lower margins that we are accustomed to in our Internet outsourcing business.”
“In terms of predictability, given the fact that we play predominantly on the enterprise side of the VAR business, we tend to do fewer, larger transactions,” he said, which made revenues “lumpy.”
That made the VAR business a drag on the share price, he said. “Even though we have a fairly strong Web service company we don’t get recognized because we have such a large VAR component overlaying that.”
So six months ago the board told Pollack and DeLeon something had to be done. In a press release issued Wednesday the company said a number of options were considered, but concluded that “divesting the low-margin, unpredictable VAR business would be a critical first step in the company becoming a leading provider of Web-based application and infrastructure outsourcing.”
When Pollack and DeLeon decided to make an offer for those assets, an independent committee of the board was set up to review the offer, which has taken several months, before making a recommendation to the board of directors.
A shareholders vote on the proposal is scheduled for Nov. 28.
Pollack and DeLeon founded OnX in 1983 as a broker of mid-range computer systems. Together they own about 40 per cent of the company and will continue running it. However, as affected parties they can’t vote on the proposal.
Although they will be majority owners and directors of the privately-held VAR business, Pollack and DeLeon will not have management roles there. Current OnX vice-president Ed Vos –- who joined OnX in March — will move to the new private company as its president.
Under the proposed deal the private VAR business, will keep the OnX Enterprise Solutions name because “customers tend to associate that name with the VAR business,” Pollack said.
The public company will get a new moniker, he said, likely next week.
There are about 105 people in the managed services and Web businesses and 45 people in the VAR business. Pollack said no one will lose their jobs over the proposed deal. Assuming it goes through, both companies will for the time being continue to run from their current premises.
Meanwhile, Pollack said, the public company is “actively pursuing” acquisitions. Last month it bought Indigo27 Inc., an Ottawa firm which specializes in Microsoft business solutions.
“At the end of the day we will have a private VAR, which is where it belongs,” Pollack said, “and a public Internet outsourcing company, which is a high-growth organization.”
In addition to hopefully improving the public company’s share value, the split “will create a better story to our customers,” he said. “Currently the story is somewhat complex between our VAR business and our Internet outsourcing business.” Allowing each company to focus on its speciality “will help customers understand better what we do.”
Despite consolidation by some VARs and the recent bankruptcy protection sought by NexInnovations, OnX’s move is not a sign that the reseller business in general in Canada is in trouble, he said. “It’s pretty evident in our (financial) results that’s not the case.”
Asked if it was painful to have to separate a business he founded, Pollack paused before replying that “it is the right business decision. The process has been a little painful, which is a sign of good governance.”