U.K. System Integrator 2e2 Sells Remaining Assets

It's almost unheard of for any reputable computer company to disappear overnight. But the dark fate of U.K.-headquartered systems integrator 2e2 is a sobering reminder of why CIOs should have a Plan B in the event a key supplier crashes and burns.

We seem to have reached the final chapter in the former stalwart of the U.K. systems integration scene's painful death, as managed services provider Logicalis Group announced Monday it will purchase the European operations of 2e2 for $31 million (€24 million). In late January, 2e2 unexpectedly went bust.

The deal involves former 2e2 competitor Logicalis, an IT and communications integrator specializing in advanced technologies and services, acquiring four former 2e2 operations: its Spanish and Irish systems integration businesses, which traded under the Morse brand; its former Channels Islands (Jersey and Guernsey) operations; and its Netherlands business, which has strength in IT service management (ITSM) consulting and service offerings. Logicalis is also taking on about 70 former British 2e2 employees who will provide IT services to British retail giant Marks & Spencer, a former 2e2 client.

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The administrators handling 2e2's affairs had hoped to sell all of its non-U.K. divisions as one entity, an aim it now seems to have achieved. But an original plan to try and sell the entire group in one go was abandoned in early February, since which time it's been a piecemeal dispersal of bits of the firm and layoffs. With Monday's announcement, there are no 2e2 IT trading bodies left.

The swoop on these last pieces of its former business rival are being characterized by Ian Cook, Logicalis' chief executive, as delivering on promises to grow Logicalis' European presence and augment its solutions and services capabilities. In particular, he said in a statement, "The Spanish business is strategically important to us to strengthen relationships with our multinational clients in Latin America [while] the service management consultancy business further enhances our services offering and allows us to introduce it to [our] wider international audience."

Cook said the 2e2 purchase allows his company to "deliver an enhanced portfolio of communications and collaboration, data center, managed services and cloud services to these new markets."

Through the acquisition, Logicalis has also added 480 employees in the Channel Islands, Spain, Ireland and the Netherlands, who bring in annualized revenue of approximately $150 million (€99 million) and unaudited EBITDA of more than $8 million (€5 million). Logicalis, a $1.2 billion (€796 million) IT services firm, now employs 3,500 people worldwide and has 6,000 corporate and public sector customers. It is also a subsidiary of a bigger outfit called Datatec, listed on the Johannesburg and London AIM Stock Exchanges, and which has revenue of over $5 billion (€3.3 billion).

So, it's good news for some former 2e2 staff, partners and customers, who may now enjoy uninterrupted service. And they may not be the most fortunate ones out of this wreck. So far, a range of other companies have stepped forward to snap up parts of the dying business, like network provider O2, which absorbed what had been a joint venture with 2e2; Daisy Group, which purchased two of 2e2's data centers; and integrator S3, which bought its Diagonal Consulting operation.

Not all clients may have been so lucky. British media reported that some 2e2 public sector clients, including Sussex Partnerships NHS Trust, which had just inked a $57 million (£38 million) outsourcing arrangement, had to scramble to find alternate providers, while 20 of its largest customers were asked for fees of up to $60,000 (£40,000) to pay the data center hosting bills for their outsourced operations. Smaller customers were only asked for $6,000 (£4,000). (It is not clear if the requested fees were ever paid.)

Those facts tell us something of how suddenly 2e2's house of cards came crashing down. The company seems to have been brought down by its bankers' refusal to lend it any more credit, following disappointing financial results and a buildup of debt.

That decline is in sharp contrast to 2e2's glory days, when its parent firm, 2e2 Group, acquired a number of once-famous U.K. and European value added resellers (VARs), such as NetStore, Compel and Morse, which had been one of Sun Microsystems' strongest U.K. partners.

But that acquisition strategy, designed to quickly build a viable player -- in 2010 the firm reported sales above $600 million (£400 million) -- saddled 2e2 Group with what proved to be unsustainable debt – at least $407 million (£270 million) by the end, a debt load that cost it $35 million (£23 million) per month to service in 2012 alone.

Some commentators say the collapse underlines the risks of contracting with cloud companies. Perhaps. But the story's bigger resonance with many observers of the U.K. business scene is that winging it on an overextended business plan without consistent support from your banker is no longer a winning play.