The merger of Irvine-based Trace3 and Data Strategy LLC in Grand Rapids, Mich. has created a formidable IT services provider with revenue surpassing $1.1 billion.
It puts the two at No. 16 among the largest private companies in Orange County, sandwiched between Irvine-based Pacific Dental Services and Newport Beach-based Alliant Insurance Services Inc.
And the top line has room to grow under the financial muscle of private equity parent H.I.G. Capital, which made an investment in Data Strategy through an affiliate.
“I’m a big believer we’re going to be a $2 billion company by 2020,” Trace3 Chief Executive Tyler Beecher told the Business Journal last week. “We are a growth machine. I think it’s going be easier to get to $2 billion.”
To accelerate the growth, Beecher and Trace3 had been looking for a strategic partner for over 18 months, reviewing over 100 companies. The chief executive didn’t expect to find the partner in the Ohio River Valley, where the founder and chief executive was still running a company twice the age of Trace3.
“It was February. Everything was frozen over,” he laughed. “But it’s a great city, the company has a great vibe. Great DNA. There’s zero overlap. It’s not a cost-cutting or investment play. We think their business and geography is totally complementary.”
The deal, pushed by Miami-based H.I.G., moved quickly after West met Midwest. Data Strategy sold a majority stake to the private equity firm and acquired equity in the new entity, which could be renamed, though that hasn’t been settled. A year ago H.I.G. took a majority stake in Trace3 on undisclosed terms that included five board members.
Last week the companies held meetings on integration and corporate structure.
“The current management team remains intact and is integrating with the Trace3 team,” Data Strategy President Dana Jacks said via email.
Last year the Business Journal reported the H.I.G stake could change Trace3’s long-held growth strategy.
The company, launched in 2002 by entrepreneur Hayes Drumwright with $100 in his pocket, zoomed past $750 million in sales without an acquisition. It shifted strategy about three years ago from assigning sets of employees to specific companies to focusing on geographic markets.
Bringing in Data Strategy boosts its presence across the Midwest and the South, adding offices beyond Grand Rapids in Detroit: Indianapolis; Columbus, Ohio; Cincinnati; Louisville; Atlanta; and Lexington, Ky.
The company has partnerships with Cisco (Nasdaq: CSCO), Dell EMC, HP (NYSE: HPQ), and Vmware (Nasdaq: VMW).
Trace3, a value-added reseller, has relied on a network of technology consultants that sell goods and services to businesses as it’s grown to one of Orange County’s fastest-growing companies.
It has more than 2,000 customers. Data Strategy, whose roots trace back to 1987 when its predecessor company was founded by Keith Harrold, has more than 6,000.
The combined companies specialize in cloud, data intelligence, security, software development and operations, and enterprise IT solutions grounded in emerging technology.
Trace3 clients can now access Data Strategy’s mobility, inventory and managed services, while Data Strategy can leverage Trace3’s security, data intelligence and cloud capabilities.
Data Strategy “specializes in integrating data center solutions in the mid-market and enterprise business segments,” Jacks said.
Privately held Trace3 has told the Business Journal it’s been profitable since inception. It employs about 500 in 15 offices, including more than 140 in Irvine. A high percentage of jobs are in engineering.
Data Strategy employs about 350 people.
Trace3’s revenue is generated entirely in the U.S., California accounting for about 75%, according to Beecher.
“One of the big differentiators for us is to be on the West Coast,” he said. “We’re the global birthplace of technology.”
Its biggest revenue-generating office is in San Francisco, though Beecher said the other California offices in Los Angeles and San Diego “are very strong.”
H.I.G. has more than $25 billion in equity capital under management, with investments in about 200 companies. The Wall Street Journal has referred to it as the “Blackstone Group of the midmarket.”
H.I.G. co-founder Sami Mnaymneh is a former Blackstone director. He and Bain & Co. graduate Toni Tamer started the Miami dealmaker in 1993.
Drumwright sold his majority stake in Trace3 last year to H.I.G. on undisclosed terms.
The company, since Beecher’s ascension to the top post in 2014, aimed to hit the $1 billion revenue benchmark with a focus on the sizzling segments of IT: cloud services, security, artificial intelligence and data analytics.
“We embraced the cloud, big part of our boom.”
Beecher said Trace3 is strong in finance, securities, healthcare, entertainment and manufacturing. He said large securities firms, including an increasing number here—hire the company to help them implement trading-floor applications and analytics. Growth in Denver—it’s fastest-growing market—is fueled by large cable operators. In L.A., it’s fueled by entertainment clients, and manufacturers “looking at us to help them streamline.”
Trace3 competes against the likes of Accenture (NYSE: ACN), McKinsey & Co. and Presidio (Nasdaq: PSDO).
Its industry influence and business have grown, thanks in part to a program Drumwright introduced four years ago for chief information officers in its customer base to meet with top Silicon Valley venture capitalists, such as Greylock Partners and Andreessen Horowitz, to get a better understanding of trends and to draw investment in an effort to drive strategic growth initiatives among customers.
“I struggle flying someone to the East Coast (let alone overseas) because they’re flying over so much business,” Beecher said. “If you look at the growth of our Orange County business, we’ve grown so much.”
Cool Factor
Beecher also likes the talent in his company’s hometown, where he also spends about half his time. “We’re into Orange County heavy. We get a lot of people from older companies who are attracted to the latest data science.”
It’s that latest technology that put Trace3 on Beecher’s radar. He was a 20-plus-year veteran of some of Silicon Valley’s biggest technology companies, including San Jose-based Cisco Systems Inc., the world’s largest networking equipment maker, and network storage service provider NetApp Inc. (Nasdaq: NTAP) in Sunnyvale.
Drumwright started a biannual pitch to recruit Beecher to Irvine, getting him in 2014. The cool factor was a big one.
“Cool people solving problems for companies with really cool technology,” Beecher said. “ We have these fabulous engineers that are addicted to new technology.”
Beecher draws a “Right Stuff” analogy, the Tom Wolfe novel about the best astronauts and engineers drawn to the U.S. post-war space program.
“These guys wanted to fly the best stuff … “That’s why we have elite engineering talent.”
And West Coast cool. Moving East.
