Good morning, thank you for joining the Insight conference call to discuss the acquisition of PCM. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the call over to Ms. Glynis Bryan, CFO. Thank you. Please go ahead.
Thank you. Welcome everyone, thank you for joining this special conference call. Today, we will be discussing the company's intent to acquire PCM, which was announced by press release earlier this morning. I am Glynis Bryan, Chief Financial Officer of Insight Enterprises. Joining me is Ken Lamneck, President and Chief Executive Officer. If you do not have a copy of the press release that was posted this morning on files with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under our investor relations section. At the conclusion of the scripted portion of this conference call, we will answer questions from participants. Today's call, including the slide presentation and the question and answer portion, is being webcast live and can be accessed via the investor relations section of our website at insight.com.
An archive copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, June 24, 2019. This call is the property of Insight Enterprises. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will refer to certain non-GAAP financial measures as we discuss Insight and PCM's financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call include adjusted EBITDA and adjusted earnings from operations.
You will find a reconciliation of these adjusted measures to the applicable actual GAAP results included in the accompanying slide presentation issued earlier today. Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made in this conference call are subject to risks and uncertainties that could cause the actual results to differ materially. These risks are discussed in today's press release and in greater detail in our annual report on Form 10-K for the year ended December 31, 2018, and our other filings with the SEC. Insight Enterprises assumes no obligation to update any forward-looking statements. I will now turn the call over to Ken for opening remarks.
Thank you, Glynis. Hello, everyone. Thank you for joining us today. As part of today's conference call, Glynis and I will take you through a slide presentation that provides key highlights of this exciting acquisition. We'll open the line up for questions. First, I want to express how excited I am to announce that the company has signed a definitive agreement to acquire PCM, a leading multi-vendor provider of technology solutions, including hardware, software, and services to small, medium, and large-sized businesses as well as state, local, federal, and educational institutions. Insight has agreed to acquire PCM for $35 a share, which implies an enterprise value of $581 million and a premium of 36% to PCM's one-month average closing share price, and an implied enterprise value to the last 12-month synergized EBITDA multiple of 4.5 times.
We believe that the addition of PCM to our business strengthens our position as a global provider of intelligent technology solutions to clients of all sizes. Through this acquisition, we gain a new opportunity to grow share within our four solution areas by adding clients, additional sales and technical resources, and complementary services capabilities. We expect that the transaction will add significant top-line scale to our business and earnings accretion through higher gross margins and through operating leverage we expect to realize as we bring our two businesses together. We'll now turn to slide four. We believe that the addition of PCM will better position Insight to capitalize on our recent investments in our solution areas and to serve our purpose of building meaningful connections to help businesses run smarter.
Strategically, through this acquisition, we'll expand our footprint in North America and the U.K., grow our share with mid-market and corporate clients who value efficient supply chain and are increasingly looking for the business outcomes that we deliver through our solution areas. Add complementary services offerings and more than $224 million annually in services sales to Insight's robust platform, which aligns to our longer-term strategy of increased and value-added solution sales within our portfolio. Increase our technical and sales coverage globally, adding more than 2,700 client-facing teammates, including 1,100 technical architects, engineers, and service delivery teammates to our business, a valuable asset that is difficult to build organically to scale. Through our greater resource and larger client base, we will strengthen our relationship with strategic partners, including leading brands such as Microsoft, HPI, HPE, Apple, Lenovo, Cisco, and Dell EMC.
Operationally, Insight is a platform that includes scalable IT and e-commerce systems, smart logistics and procurement processes, and robust digital marketing capabilities, all backed by a culture of continuous process transformation and automation. When combined with PCM's unique operational delivery model based out of the Philippines, we believe we can integrate the PCM business quickly and allow for cost synergies along the way. Financially, we expect that PCM will add more than $2 billion in top line at gross margins of more than 15%. We expect to achieve annualized cost synergies of $70 million by the end of 2021, with more than half of the synergized realized in the first 12-18 months as we consolidate IT and delivery systems, real estate, and the operations of the two organizations.
In 2020, we expect the transaction to add more than $0.70 in adjusted EPS to our consolidated results, excluding deal-related integration expenses and intangible amortization expense. Moving to slide five, let me provide an overview of PCM's business. PCM is a leading provider of technology solutions, including hardware, software, and services based in El Segundo, California. PCM currently operates across the U.S., Canada, and U.K., and they have an internal-facing operations team in the Philippines. Of the 4,000 total teammates, more than 65% are client-facing in pre-sales, sales, engineering, or service delivery roles. Through organic initiatives and acquisitions, PCM grew to approximately $2.2 billion in sales in 2018, reflecting a compound annual growth rate of 12% over the past four years. Over the same period, gross profits grew faster than sales and gross margins in 2018 were north of 15%.
We believe PCM's strategy for growth, including a solution-led sales approach, will fit well into our go-to-market and complementary capabilities provided by both organizations. Also on the slide, we see the current mix of sales by client and by category. PCM serves a diverse set of clients across the mid-market, corporate, and public sector. From a client mix perspective, 37% of PCM's 2018 sales were in the U.S. mid-market, with 12% in the U.S. public sector. U.K. and Canada represent 12% of sales, with the remaining 39% derived from U.S. corporate accounts. Their deep partner relationship with leading brands like Microsoft, HPI, HPE, Apple, Lenovo, Cisco, and Dell EMC have resulted in a net sales mix by category of 75% hardware, 15% software, and 10% services sales, which aligns well with Insight's portfolio of sales. Next, onto slide six.
PCM's business mix also aligns well with our solution areas. First, PCM's broad range of product sales to mid-market and corporate clients plugs in directly to our supply chain optimization solution area. Second, PCM is expected to add competency to our connected workforce solution area with services capabilities around end-user support and deployments, service desk, on-site programs, and Microsoft licensing solutions. In addition, PCM brings technical talent and offerings to our cloud and data center transformation solution area, where they lead with security and cloud consulting. In complement, Insight's offerings are expected to bring deeper expertise around the workforce modernization mobility, data center transformation, including on-premise and hybrid cloud solutions, and digital solutions that leverage IoT and machine learning to PCM's business. Together, we will offer a much broader range of services offerings to our combined clients and have access to deeper technical engineering skills than either company offers alone.
Next, onto slide seven. In addition to the opportunities for growth in sales and profitability I've just noted, there are many other unique benefits to bringing the two businesses together. First, we're excited about the opportunity to bring more scale to our North America business by adding approximately $1.6 billion in net sales with mid-market and corporate clients. In addition, we expect that PCM will add approximately $260 million in net sales to our public sector business, adding net new clients and scale to our business, which strengthen software sales, state, local, and education clients in the U.S. With PCM's business, we expect to increase our net sales in Canada by about 70% and add new technical and professional services capabilities, along with nearly 300 service delivery teammates in that market.
We also expect we will add more than $60 million of net sales for our NA business with new hardware, software, and services sales to clients in the United Kingdom. On the teammate front, as a Fortune 50 top places to work in technology, we believe that our value-based culture creates a great place to work for all teammates, whether client-facing or in our support organizations, and that Insight can provide PCM teammates with opportunities for growth and development. We're excited to welcome the PCM teammates to the Insight family. Together, we will solidify our position as a market-leading solution provider with global scale and deep technical talent, helping clients across the globe run their businesses smarter. Together, we expect that we will drive net sales of more than $9 billion annually at higher gross margins than Insight alone.
We'll have more than 7,500 client-facing teammates combined, including sales and pre-sales, software development, design and engineering, and implementation and management, a technical pool of talent that we believe will differentiate us in the marketplace compared to our competitors. We expect that we will expand deeper into the mid-market and corporate space end markets with substantial opportunity for scale and growth within our solution areas. Both Insight and PCM have operated successfully as independent public companies, with each bringing over 30 years of experience in providing leading technology solutions to help clients solve their toughest IT challenges. This combination aligns well to Insight's strategic, operational, financial priorities around business combinations. Together, this union brings strong synergies and incremental value to our organizations, which we believe will allow us to enhance our value proposition to our clients, partners, teammates, and shareholders.
I'll now turn the call over to Glynis, who will walk through some of the financial details of this transaction. Glynis?
Thank you, Ken. Starting on slide nine. As you know, we have signed a definitive agreement to acquire PCM for $35 per share in cash, implying an equity value of $474 million and an enterprise value of $581 million net of cash and debt acquired. The share price represents a 36% premium to PCM's one-month average closing share price as of Friday, June 21st. For the 12 months ended March 31st, 2019, PCM reported approximately $2.2 billion in net sales and adjusted earnings before interest, taxes, depreciation, amortization, and one-time items of $60 million.
The purchase price implies a transaction multiple of 4.5x, calculated as the ratio of enterprise value to PCM's last 12-month adjusted EBITDA, excluding the $70 million in expected synergies. Assuming a closing sometime in the second half of 2019, we expect this acquisition to be accretive to earnings in 2020, including approximately $25 million in transaction costs, restructuring, and integration expenses, most of which will be incurred in 2019 and excluding acquisition-related intangible amortization expense. We expect to achieve our expected annualized run rate synergies of approximately $70 million by the end of 2021, primarily from efficiencies related to corporate expenses, streamlining sales and service delivery operations, and the effects of combined technology systems and operations. As Ken noted, we expect to realize more than 50% of these synergies within the first 12 to 18 months.
We have a strong track record of effective M&A integration, as evidenced by our most recent acquisition. As discussed on our last call, we believe we have a disciplined operating model for evaluating acquisition targets and efficiently integrating these businesses post-closing. As we move towards the closing and integration of PCM, we expect to deploy the same best practices to help us deliver the expected synergies in our financial results. We believe that this transaction will contribute materially to shareholder value in the future. We expect to fund the transaction with cash on hand and borrowings under a new credit facility. In anticipation of this transaction and future working capital needs of the business, we expect to consolidate our existing asset-based securitization and revolving credit facilities into a single $1.5 billion asset-based revolving credit facility maturing in 2024.
We anticipate borrowing approximately $620 million at closing, which fits comfortably in our capital structure, with resulting leverage at less than 2.5x trailing 12 months EBITDA of the combined business. We expect to pay off the acquisition-related indebtedness within three years through strong cash flow generation. We expect to incur approximately $35 million in incremental interest expense over the first 12 months post-closing, including origination costs associated with the new credit facility and cash interest from borrowings to fund the acquisition. The acquisition is expected to close sometime in the second half of 2019, subject to various customary closing conditions, including regulatory approval and approval from PCM shareholders. Post-closing, consistent with our practice for similar expenses, Insight intends to record certain transactions in accordance with our accounting practices.
These adjustments will relate to the income statement presentation of certain service delivery expenses, including movement of certain costs from operating expense to cost of goods sold. This reclassification will have no impact on net sales or profitability or overall profitability of the PCM business, but will have a modest effect on PCM's reported gross margin. Moving on to slide 10. As we look forward, we're excited about the opportunity to realize the value we believe exists within the combined business. We believe that adding PCM will add immediate scale to Insight's top line overall and to our services category in particular. On the gross margin line, the PCM business drives gross margins of more than 15%, which are slightly higher than Insight's consolidated gross margins exiting 2018 of 14%, due to their mix of sales to corporate and mid-market clients.
We believe there is opportunity to accelerate sales in these markets by leveraging Insight's digital marketing engine within the PCM sales process. In addition, we believe there is minimal overlap in the client base between PCM and Insight, which we believe will allow for cross-sell opportunities within the PCM client base across our four solution areas. In addition to the economic benefits on the top line, we believe the transaction will create significant shareholder value in the future. We believe the synergized valuation multiple of 4.5 times represents a good value for this business. We expect to realize about $70 million in synergies by the end of 2021 as we bring the two companies together, with more than 50% to be realized in the first 12 to 18 months.
Finally, we expect the business to drive material earnings accretion over time, and in its first full year as part of our business, we expect it will add more than $0.70 to 2020 adjusted EPS. That concludes the slide presentation this morning. At this time, Ken and I are happy to answer your questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Adam Tindle with Raymond James Financial. Please proceed with your question.
Okay. Thanks, and good morning. I just wanted to start with some strategic questions. I think prior to today, Ken, the M&A strategy that you had talked about was focused on skills, expanding geographic markets, and the strategic direction for the company was more on growing services. Just want to touch on those two points because PCM's going to be the largest acquisition in company history. So trying to understand maybe why the pivot towards a more scale-based acquisition versus stringing together three more Datalink-type acquisitions. Secondly, on the strategic direction on services, this is going to increase the mix of hardware. I think you said PCM was 75% hardware, and Insight had been focused on moving away from this and growing services. So hoping you can also touch on the strategic fit.
Thanks, Adam, for that. Strategically, as you know, we've been very focused on how do we build out more of mid-market play from an account-based point of view, as we've been more skewed towards large to enterprise clients. That's an area that PCM brings a lot of value to. It's around about $1.6 billion of their business is in mid-market and corporate clients. Basically, you're talking to corporate, we define as 1,000 to 5,000 seats
In mid-market as the 1,000 seats or below. They really help enable and grow our business, which allows us really to take the engine we built in the four solution areas, to extend that to a much broader base of clients, which is really important for us as we move more towards, into these solution areas. That strategically was very important to us. Additionally, it does bring $224 million in services revenue to us at added gross margin. The scale play makes sense for us, of course, as we talked about with the $70 million synergy number of achieving this at 4.5 times. This gives us the real ability to scale, to move them onto our IT platform, which we can do very efficiently as we, of course, exhibited through the Datalink acquisition. It also really helps our Canadian business quite a bit.
It adds 70% more to their business. It brings us to the number three player collectively in Canada now, whereas we were both sort of sub-10 before that. It adds certainly strength there. It gives us Cisco Gold status in Canada, it also provides us a much needed service delivery capability in Canada as well. There were a lot of real strategic benefits that really help us with this acquisition.
I think also, Adam, the one thing I would add is that it also enables, from an overall solutions perspective, we have a client base in that $1.6 billion of mid-market and corporate that we can sell our four solution areas into. Also this is access to a broader client base that can benefit from those types of solutions that we bring to market, it's a client base that we didn't have a strong presence in previously.
The cash flow out of it, as you know, is very solid, and it's going to indicate that we expect to pay this back in three years. I think from all those perspectives, it really was a make sense opportunity for us.
Okay. Maybe just as a follow-up on the synergies, that $70 million number, if I've got it right, it looks like it'd be just over 20% of PCM's standalone OpEx. I guess, the first question would be, talk about how you arrived at that number. It does look like a similar ballpark as the Datalink target, which you achieved. Maybe just talk about how you arrived at that number. Second, maybe just comparing the composition of synergies here to that Datalink deal would also be helpful.
Yeah. I'll touch on, and then Glynis will certainly add. Certainly, one of the benefits of public company, of course, is you get immediately to take out a lot of the public costs that are very duplicative. That, those become somewhat immediate. Then, we really looked at this through quite a bit of detail, looking it down literally at the individual levels, locations. There's lots of locations that are duplicative that'll take a little bit more time to get those costs out. When you look at the IT platform, PCM has commented that they've got close to 60% of their business onto SAP already. It's a very close version to which we're running. There's a lot of duplication around IT that we'll also be able to take costs out. We feel very comfortable with that $70 million number.
As you indicated, of course, similar to what we did with Datalink, and in fact, we did exceed. We had commented about $20 million for Datalink, from a synergistic point of view, and we actually achieved $25 million within the same period. We're comfortable with that number, and we think it will add significant value to our shareholders. Glynis, did you want to touch any more on that?
I think that probably summarizes it well. We have opportunities across the board. One of the things that we do when we first start looking at these is we exclude commissions to the salespeople right off the bat, because we assume that we're going to retain the salespeople. We want them to sell, and we want to continue paying them commission. When we look at synergies, it's kind of that G&A number, ex commissions, and then that's what we apply our view to with regards to how we can drive what value of synergies can we drive through the remainder of the business. We think there are lots of opportunities for consolidation here in the back office functions, as well as in the scale in terms of the service delivery pieces.
The model's also pretty conservative, Adam, in that we don't basically assume that we're going to grow revenue in the short term for their business. We don't expect to lose any revenue, but there's lots of opportunities for us to be able to sell more into the PCM solution areas as required. We exclude that at this stage.
Just to clarify that $70 million number, is that a net number, or is that a gross number? Can you help with how much reinvestment there soon?
It's a net number. Well, net based on what we know today, ultimately. The reinvestment is kind of consistent with what their run rate has been. I wouldn't say that we're going to do anything different from a run rate excluding back office perspective, if you want to think about it that way. We think that we have some benefits that we will be offering to them that are maybe a little bit more beneficial for the team versus what we have. There's some cost synergies that we factored into that as well too. Net-net, when we talk about the synergy number, it is a net savings number that we're anticipating, given a couple of areas where we think we'll have some increased costs.
Thank you.
Thank you. Our next question comes from the line of Matthew Sheerin with Stifel. Please proceed with your question.
Yes, thanks. Good morning. Just following up on Adam's questions regarding the customer base. I know you do have large volume customers, both on the solutions and the transactional side, and I know PCM does as well. You're saying basically there's no overlap, which is kind of surprising. Is there a geographic difference in terms of where your strengths are versus PCM's? We haven't been able to see that much from a client point of view at this stage, as you can imagine, obviously. Our sense, we compete with them every day. I don't think there's much differences in geographic. There are certainly some acquisitions they've done that certainly indicate maybe more concentration in certain areas of their business, I don't think it's really a geographic play. Matthew, the big difference is that there is some overlap.
Certainly, there's always going to be some overlap, but we think it's pretty minimal from what we've discussed thus far. The big difference is that we've been very focused on large to enterprise-type clients, Fortune sort of 1,000, whereas their focus really has been much more around that mid-market corporate client, which, as you know, we've been invested in and trying to scale ourselves organically for quite a while. We think it really adds quite a few number of clients to the portfolio. About $1.6 billion, again, of their revenue comes from this space. We think, certainly will those accounts be assigned to some of our salespeople? Of course, they will. When you look at where the profit dollars are being generated, I think it'll skew more heavily towards their business.
We don't think there's going to be a tremendous amount of material overlap at the sales rep level for those accounts.
On the government side, I know that you've got, obviously, a lot of strength in software. Could you just talk about where PCM is going to be complementary to your government in both SLED and federal?
Yeah, it's sort of interesting. Certainly at the Fed model, we're very heavily focused on the software side, as you know, and they help us complementary in the hardware side in the Fed space. It's interesting that some of the opposite on the SLED side, where it's sort of opposite, where they bring actually more strength on the software side to us there. That's going to be complementary as well. They've got a good-sized business there, and I think that combination together is really going to scale nicely for us.
Looking at, obviously, you've done a lot of work on PCM, and I know the company over the years has, it is of itself gone through lots of transformations. In looking at the business, are there any parts of the business that doesn't make sense for you? For instance, I know they do their own public cloud hosting, for instance. There are other things where there might be opportunities to walk away from some of that business?
Yeah. Matt, you're doing your homework. We definitely are looking at those pieces, that one specifically, to see if that really fits well into the portfolio. That'll be one of the first things that we'll look at to see how that might fit within the portfolio. All the other pieces that we've looked at seem to fit very nicely into the business. The hosted business is one that we'll look at pretty carefully. It's a relatively small part of the business, but it's an area that we want to see if there's an opportunity there for us to take advantage of or if that's something that may not strategically fit long term. We'll have to assess that because we don't know enough about it yet.
Okay. Thank you. Just lastly, could you just talk about the process here? Were there multiple bidders for PCM? Just talk about how this transpired.
Matt, I would say that PCM didn't do a broad-based auction process. It was primarily conversations over the past couple of years that we've had with PCM that kind of culminated ultimately in this transaction. I can't speak to the specifics of what they did in the background, but we have been having a dialogue with them over, I guess, two years or so, in different areas. As it culminated kind of late last year going into this year, it was primarily around this specific merger and them being very concerned with confidentiality and moving forward. I would say that we were the forerunner for them, primarily because of the relationship between our two CEOs.
Okay, fair enough. Okay, thanks so much.
Thank you. Our next question comes from the line of Marc Wiesenberger with B. Riley. Please proceed with your question.
Yeah, good morning. From a cultural and operational perspective, can you talk about maybe some of the similarities of the both companies and some things that you might feel might help smooth and expedite the integration process?
Yeah, Marc. From a cultural point of view and area we certainly look at, Frank and I have had a long-term relationship for quite a few years, we think culturally, we have certainly the same vision, the same approach to teammates and how we approach our partner base and our client set. We think there'll be a lot of similarities, a lot of goodness in that regard in the combination coming together. We're pretty pleased there. Operationally, again, as I mentioned, what's critical on these, of course, is the integration becomes so critical for us from an IT systems platform point of view. We're pleased that they've got the majority of their business on SAP. It's very close to the same sort of version that we're using, we don't anticipate that that's going to be an issue.
We'll be digging into those details. We'll expeditiously look at how do we bring the rest of the business onto the SAP platform so we're on one platform for them. We have good capabilities, good competencies around that. As you know, we've done that successfully here in the U.S. We've done that and brought our Canada business onto that platform. We brought our Asia Pac business onto that platform. We brought Datalink onto that platform. All the other acquisitions like Cardinal and BlueMetal and so forth, all onto that platform. We don't want to take it for granted. We feel we have the competency and capabilities. Also bringing the e-commerce engine together. They have a strong e-commerce engine from many of the acquisitions they've done, bringing that all together in a seamless fashion.
A lot of experience around that. We think that's where a lot of the cost synergies will come from. For us, from an advantage point of view, we think we'll be able to service collectively our clients and the partners more seamlessly with this combination.
Great. Thank you very much. That's all I have this morning.
Thank you. As a reminder, ladies and gentlemen, to ask a question at this time, please press star one on your telephone keypad. Please hold while we poll for any additional questions. Ladies and gentlemen, it appears we have no additional questions at this time. This does conclude our question and answer session, and this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.