After AppDirect Sale, TBI, Shepstone Reckon with Layoffs Fallout

“If anyone promises you equity, get it in writing,” a former TBI employee told Channel Futures.

James Anderson, Senior News Editor

February 16, 2023

14 Min Read
Layoffs
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The long-expected sale of TBI to AppDirect has garnered celebrations from those involved in the deal and those who will participate in the combined company. It’s another story, however, for the employees the company left behind.

Earlier this month AppDirect announced the acquisition of TBI, one of the channel’s last-standing independently owned national technology services distributors (TSDs). The deal, which closed upon its public announcement, marks a significant win for the B2B subscription commerce provider’s efforts to gain market share in the TSD market, improve its telecom expertise and ultimately drive adoption of its “relationship-based marketplace.”

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TBI’s Geoffrey Shepstone

For TBI owner Geoffrey Shepstone and many members of his senior leadership team, the acquisition meant a large — though lower than expected — payout and a job at AppDirect going forward. But for the dozens of TBI employees laid off prior to the acquisition, their exit reportedly came as a shock.

Channel Futures reported that at least 58 people had been laid off in two separate workforce reductions prior to the closing of the deal. Other estimates in the past week have put that number even higher. TBI last year disclosed to the Chicago Tribune that it employed 230 U.S. workers. AppDirect did not provide an official number of people who joined AppDirect from the TBI side, but sources indicate it is closer to 150. Sources have clarified that a sizable portion of employees left TBI of their own accord in the last year.

The cuts ranged from executive leadership team members all the way down to the individual contributor level.

Most acquisitions involve layoffs, especially when merging entities carry duplicate positions as AppDirect and TBI did. Moreover, layoffs at the seller’s company may occur before the parties officially ink the sale. However, terminated TBI employees who shared their stories with Channel Futures criticized company leadership for how they primed their expectations leading up to the transaction.

You can find all of Channel Futures’ AppDirect-TBI merger coverage here.

Former TBI Employees Speak

Former employees speaking on background or off the record with Channel Futures say they felt blindsided by the layoffs. Many say TBI verbally promised a share of the acquisition proceeds. According to sources, TBI owner and president Geoff Shepstone gave multiple spoken promises of a profit-sharing program in companywide conference calls but ultimately did not follow through on them, due in part to a lower valuation that he accepted from AppDirect.

AppDirect through a spokesperson declined to comment on this story, and Shepstone also declined to comment. Multiple affected employees spoke to Channel Futures on background. They all requested anonymity for fear of repercussion.

Many spoke positively of their time at TBI, describing their respective departments as a second family with which they wanted to finish out their careers. It was their commitment to the company’s mission and their hope that the company would reward them that made TBI’s layoffs more painful.

Other sources say Shepstone’s loyalty to his employees led to the company keeping an oversized payroll that ultimately no buyer would accept without drastic cutbacks. He had reportedly refused to conduct significant layoffs over the years.

“You’re damned if you do and damned if you don’t,” a source close to Shepstone said.

Timeline

When private equity investors converged on the TSD market two years ago, Shepstone and his senior leadership team made the vow that they would not sell to a private equity firm. While the teams at Telarus, Avant and Bridgepointe celebrated deals with respective buyers, TBI took a decidedly contrarian approach.

TBI executives remarked to Channel Futures at the time that they believed many agents were choosing to do business with them because of the Chicago-based company’s independent streak.

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TBI’s Mike Onystok

“We believe we’re the last best place to put your business,” senior vice president of strategic sales Mike Onystok told Channel Futures in 2022.

At the same time, Shepstone was starting to …

… evaluate his options. He told employees on a companywide call that he was weighing potential offers and would make a decision that most benefited employees, according to sources.

Many potential buyers kicked the tires on an acquisition, but sources said AppDirect, Avant investor Pamlico Capital, Ingram Micro, ScanSource and Telarus investor Columbia Capital were the ones that engaged in serious talks. And by the end of 2022, those talks were getting more serious. Last fall Shepstone told the company that two particular buyers were eyeing it and would be visiting the Chicago office, a source said.

The first workforce reductions took place after the company’s Christmas party, multiple sources confirmed. About a dozen people were laid off, due in part to areas of the company that had slowed down. For example, project managers got pink slips because projects had frozen, a source told Channel Futures.

Shepstone went on to assure remaining employees on a conference call that they would stay at the company that would acquire TBI. However, more bloodletting came, with dozens more positions eliminated in the days leading up to the acquisition.

Other Suitors

According to sources, all of the suitors except for AppDirect had backed out of the process. Some of the others told Channel Futures privately that they couldn’t take on TBI’s payroll, knowing that the ensuing mass layoffs would damage their reputation among partners.

Although a steady stream of employees had left the company of their own accord in the last year, the TBI employee roster remained bloated, sources told Channel Futures.

“I think that [bloating] became more so, as the worst kept secret was being more public, and most certainly involved a downturn in business,” a source said. “Bloating also became a factor due to overhiring, but also lacking the true investment and innovation in channel quickly and effectively.”

Multiple sources close to the matter indicated that the final offer from AppDirect was approximately $65 million, almost half of what Shepstone was seeking. Part of the deal is reportedly performance-based, meaning that Shepstone is in line for another payment down the line. He now serves as a strategic advisor to AppDirect.

Shepstone, the sole proprietor of TBI, did not respond to questions from Channel Futures about the transaction or the layoffs.

However, Shepstone told TBI partners on a recent webinar that he chose AppDirect because he did not want to align with private equity. He described the buyer as a “safe harbor” that would not seek to flip its investments in the short term. Caisse de Dépôt et Placement du Québec (CDPQ), one of AppDirect’s largest funders, is not a private equity firm but rather an institutional investor with a history of long-term investments.

‘Get It in Writing’

Laid off TBI employees reported feeling “strung along” by expectations of assurances that they would get a financial piece of the deal.

Shepstone in the months leading up to the acquisition told employees that TBI would offer a profit-sharing program in the event of a transaction. Multiple sources within the company confirmed that Shepstone on at least two occasions made those claims on companywide conference calls.

Shepstone also made promises of equity to members of the senior leadership, and for many of the company’s recent SVP hires, the promise of equity factored heavily into their decision to join the company. Those promises of a lucrative buyout package even came to employees further down the org chart to the manager level, according to sources.

Former TBI employees tell Channel Futures that they took these verbal promises seriously. In many cases, they turned down job offers – many of which paid better – in hopes of seeing things through to the end.

But no profit-sharing program came to fruition. And virtually none of the employees below the senior leadership level saw any payout package. On the contrary, many who held closely to Shepstone’s promises found themselves out of a job.

From their perspective, they had been chasing a dangling carrot …

… for years.

“The overall sentiment on employees is they are and were being strung along the last couple years [by promises] of a potential payout or seed money, with a potential acquisition,” a former TBI employee told Channel Futures under the condition of anonymity. “Leadership insisted that they would have it in writing, but to no avail. Most of the folks, it would appear, didn’t get anything.”

Payout Promises?

For some sources higher up on the org chart, promises of a generous payout seemed too good to be true from the start. But many employees, especially younger ones who joined TBI straight out of college and had only ever worked for that company, didn’t know any better.

“If anyone promises you equity, get it in writing,” one source said.

Many TBI employees in vice president roles did receive a payout — 14, according to reports. But other vice presidents, many of whom joined the company in recent years, lost their jobs in the workforce reduction. Laid off members of the executive team included vice president of marketing Anne Mitchell, senior vice president of strategic partnerships Scott Whalen and senior vice president of global sales Brandon Smith.

[Editor’s Note: An earlier version of this story incorrectly stated that vice president of partner and supplier experience Samantha Zuniga was laid off. She resigned from her position in December.]

Multiple sources told Channel Futures that Shepstone had every intention of giving everyone the payouts he had mentioned. And that sentiment fits well with the picture of Shepstone as a business owner who very much wanted to see all of his team succeed. The problem, according to sources close to Shepstone, was a drastically smaller price tag that TBI earned from AppDirect, which set much of the fallout in motion.

But former TBI employees reiterated to Channel Futures that Shepstone had nonetheless made promises to them. And they had staked their livelihoods to those promises.

“These decisions, or lack thereof, whether it was out of malice or ignorance, still affect employees and partners,” a former TBI employee said. “Neither are a factor in stringing employees along. Some folks that have been there for 14 years and strong contributors to the bottom line, got nothing, whereas an employee who’s been there for less than five years and wasn’t in a revenue-impacting roll, got a payout. This speaks to the favoritism and politics that were so detrimental.”

A Different Valuation

A source with intimate details of the transaction noted that Shepstone “still paid out millions” to different employees.

And many of the laid-off employees, the source said, probably wouldn’t have stuck around as long at a different company. Shepstone reportedly had refused counsel to trim his workforce over the years. On one hand, he felt loyalty to his employees, and his diversified business portfolio meant that he didn’t feel any pressure about squeezing TBI’s margin, according to a source.

“Geoff was a relationship guy and valued old-school Midwestern values. He wasn’t aggressive in shaking down vendors for MDF funds, and he wasn’t aggressive in keeping a lean payroll,” the source said.

But it was that “Midwestern” mentality that did not align closely to the interests of strategic buyers, the source said.

“The industry has evolved now to where margins have shrunk. The modern channel today requires much more aggressive style than the way Geoff operates,” they said.

The Rise and Fall

Ten years ago, TBI was playing at the top of its game. The company raked in a $1 million bonus from CenturyLink for growing its business with the company by more than $2 million monthly over the course of five years. CenturyLink had required agents to complete the task within five years; TBI had done it in three. Then it performed the feat again in 2014.

The company had earned a reputation for its back-office management that stood out in a world of tedious telecom vendor processes. In addition to its accomplishments with CenturyLink and later Lumen, a brand it transitioned to in 2020, the TSD has earned numerous accolades from AT&T and other ILECs and developed a reputation as one of the stronger TSDs in the area of mobility.

In the eyes of many, TBI and California-based rival Intelisys were fighting neck-and-neck for leadership in what was then known as the master agent channel. Telarus had not yet acquired VXSuite and CarrierSales; cross-town rival Avant was only four years old and TCG had only just started to see a resurgence under Dan Pirigyi.

TBI in 2013 stated that it was making more than $30 million in annual revenue with more than $10 million in monthly billings, according to a Channel Futures article. And by all accounts, the growth continued. The company reported a 25% compound annual growth rate (CAGR) from 2014 through 2018. That came in part from big gains on the SD-WAN, UCaaS and CCaaS fronts to complement its existing strengths with the ILECs.

TBI, which was founded in 1991, represented one of the oldest players in the space and seemed like one …

… with the scale and processes required to be a buyer rather than a seller in the long term.

But that didn’t occur.

Investment in People

On one hand, sources said one problem ultimately came down to investment, and much of that investment had to do with people. Although TBI excelled at recruiting talent from outside the channel and outside of telecom, keeping talent proved challenging. The TSD by many accounts was not spending as much on salaries as it needed to keep people with the company long-term.

A 2015 Glassdoor review sums up the mixed bag well:

“While the company does a good job of finding talent, internally, they don’t really do a good job of compensating employees relative to their new positions as they rise. Employees are not making what they deserve relative to like-positions with other employers in the industry,” a former employee wrote.

That being said, TBI did shell out significant dollars to bring on vice presidents in recent years. However, many of those leaders ultimately found themselves impotent to bring innovation. And many of them are no longer working with TBI/AppDirect today.

“Quite a few folks exited from the organization who were hired to make positive changes but ultimately couldn’t control the politics,” one source said.

The politics had much to do with the vacuum of power that existed in Shepstone’s absence. Shepstone had built a successful business, but he also ran other businesses. In addition, he spent a significant time away from work, going on hunting trips abroad.

No one could fault Shepstone for maintaining a healthy work-life balance, but difficulties emerged around who would be manage the company in his absences. With no one specifically hired as a business manager, the de facto power resided in a small handful of senior vice presidents. And although those SVPs’ respective departments reported tight-knit cultures, respectively, sources say they often were misaligned and even competed with one another.

“Geoff was never much involved in the day-to-day. He enabled incredibly bad leadership and wasn’t very secretive about how much he enjoyed the political games internally,” a source said. “It created a feeling that if you weren’t part of the inner circle, regardless of your thoughts, skills and ideas – it wouldn’t matter.”

A Teachable Moment

One source remarked that the public reaction to the TBI layoffs says a lot about the overall personality of the channel. Layoff news hits LinkedIn on what seems to be an hourly basis. So often large vendors – whether publicly traded companies like Salesforce, RingCentral and Intel – or privately traded firms like Talkdesk and SADA – are shedding massive swaths of their workforce. It is no surprise to see activist investors pushing for large vendors to cut people in the name of profit. Some executives, such as Zoom’s Eric Yuan, have even garnered praise for what pundits call well-done layoffs.

But in the smaller world of the technology advisor channel – particularly on the partner side – these moves come with sharper consequences. People comprise the channel, and their bonds to one another run deep. As a result, loyalty and trust remain as precious a currency as ever.

“This entire situation was very disappointing on how it played out. It could have been avoided with clear communication, better leadership and, ultimately, focusing solely on partners,” a former TBI employee said. “Because it wasn’t, it spiraled into a PR disaster. Ultimately, the partners and employees suffer – and that’s the saddest part.”

Want to contact the author directly about this story? Have ideas for a follow-up article? Email James Anderson or connect with him on LinkedIn.

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About the Author

James Anderson

Senior News Editor, Channel Futures

James Anderson is a senior news editor for Channel Futures. He interned with Informa while working toward his degree in journalism from Arizona State University, then joined the company after graduating. He writes about SD-WAN, telecom and cablecos, technology services distributors and carriers. He has served as a moderator for multiple panels at Channel Partners events.

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