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(This article appeared first in Direct Access, a Microsoft UK online channel magazine.)

Pundits often talk of Internet disintermediation – basically manufacturers bypassing distribution to sell direct to customers. However, few vendors are set up to sell complex solutions – they will continue to rely on resellers to sell their products.

But which ones?

According to a poll of European IT directors conducted by Morgan Stanley Dean Witter (MSDW) published last week, it looks like the focus of expenditure is turning away from traditional IT projects. Instead, big companies are "raising their spending on "e-business applications such as e-procurement and online exchanges" the Financial Times reports. "As they do so, some of the more traditional systems integration companies are finding their skills are no longer in demand."

Thirty five per cent or so of the companies surveyed by MSDW intended to spend more than 20 per cent of their IT budgets on Internet products, and 13 per cent of this spend is a straightforward switch from traditional IT areas.

MSDW picks out new beneficiaries of IT director largesse such as the big Web integrators, such as Razorfish and Scient of the US, and Icon Media Lab of Sweden.

Compel, Computacenter and SCH, the UK's three biggest corporate resellers, all have Web integrator shops, but these are puny by comparison with their mainstream operations. All appear underweight in the booming network integration market, too.

Computacenter and SCH are big enough to fend for themselves, but what about Compel, by UK reseller standards, a very big company indeed.

One way or another, it looks like the big three UK corporate computer resellers are going to end up being the big two.

Compel, the Welwyn Garden City, Herts, reseller, depending on who you listen to, the UK’s second or third biggest IT product supplier for UK Big Business. But for how much longer can it remain as an independent entity?

By all accounts, Compel is one of the best-run channel businesses in the UK. Over the last decade, it has been the most successful acquirer of resellers and, where others have stumbled, it has grown smoothly. There have been no nasty surprises, no excuses for shareholders. Until now.

And it’s not all Compel’s fault: very simply, corporates are not – post Y2K - returning to their old, free-spending ways. And, unlike Computacenter and SCH, which have big distribution arms, Compel has no SME turnover to cushion the fall.

In May, the company issued a profit warning, blaming its inability to meet analyst forecasts on the Y2K overhang. The share price promptly collapsed, giving privately-held Specialist Computer Holdings (SCH), Europe’s second biggest reseller, the opportunity to snap up 11.3 per cent of the company at the bargain basement price of 200p per share (in January, Compel shares hit a high of 628p).

Ordinarily, this would be a cause for some discomfort – few boards would be comfortable with a rival owning a large chunk of their company. Certainly, the share raid was something to stick in the craw of Computacenter, Europe’s biggest reseller and runaway market leader in the UK. A combination of Compel and SCC, the corporate reseller arm of SCH, was not something the company wished to contemplate.

On May 22, it tabled a 275p per share bid with the Compel board, but failing to get agreement, the company went public with a hostile offer.

Mike Norris, Computacenter CEO, said: "I continue to hope that the Compel board will co-operate with our approach.

"An offer would provide Compel shareholders with the opportunity to exit, at a significant premium to the current share price and in cash, from a market which is both scale sensitive and consolidating."

The company said it made the announcement "to facilitate a more open discussion with Compel's shareholders on the attractions of Computacenter's proposals".

After hemming and hawing in the pages of the Financial Times, Specialist Computer Holdings said it too was mulling over whether it should make a bid. The company will probably mull against - Compel has been put into pay, while it is still digesting a huge acquisition (Info'products).

It is Compel’s misfortune that it has relatively few white knight options – sentiment is against reseller stocks, which means that few companies outside the channel, would be interested in buying. Also, very few resellers could afford to buy - even at its current share price.

But Compel is not giving in without a fight: "The board of Compel regards Computacenter's current proposal as opportunistic and one which significantly undervalues the company," it said in a statement. "Consequently, the board of Compel advises shareholders to take no action with regard to their shareholding in Compel."

From the message, it appears that Compel directors would not be too averse to the company being bought, more that the price is too cheap.

This is sensible: Compel directors have a duty to their shareholders – which means not getting too emotional. The sort of money that Computacenter is offering, does look decidedly low, for a company with turnover. However, the best way for Compel to maximize shareholder value, is probably by folding into a larger company.

It is no longer enough for a corporate reseller to be Pan-UK, if you want to gain mindshare from large vendors (hence SCH’s takeover of Info’products, to take it into Dutch, French, Spanish, Italian and German markets). ®

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