Managed Services Software Mergers: Who Will Fire the First Shot?

Picture this: You compete in an emerging, fast-growth software market. The highly fragmented industry is filled with multiple,  successful software companies. Most of the companies are relatively small and privately held. Suddenly, industry growth rates slow a bit amid the recession. So, what happens next? Mergers and acquisitions. That’s the scenario facing the managed services software market. Here’s where I think we’re heading next.

First, some background.

Why Now?

Nimsoft CEO Gary Read inspired me to write this blog post. During a recent phone call and in a recent blog post, Read conceded that Nimsoft has been the subject of takeover speculation by the media — though he downplays the rumors. Read also told me he hears from at least one company daily seeking to be acquired.

Level Platforms CEO Peter Sandiford insists his company has seen no sign of slowing MSP industry growth. I respect Sandiford, but I think his outlook is a bit too optimistic. Just about everyone else I’ve heard from — Autotask CEO Bob Godgart, ConnectWise CEO Arnie Bellini, N-able CEO Gavin Garbutt, Nimsoft’s Read, and so on — says industry growth rates are either slowing or becoming far more challenging. I think that market reality will drive M&A activity.

To be clear:

Money Matters

Now here’s where things get interesting. Some privately held MSP software companies have angel investors and venture capitalist funding. And at some point, those investors will want to cash out — either through an IPO or by selling the company.

On the flip side, big technology companies — Microsoft, Cisco Systems, etc. — are sitting on billions of dollars in cash and looking for growth-oriented acquisitions. The big questions… Will MSP software providers:

Of course, scenarios vary from company to company. Some firms — such as ConnectWise and Kaseya — were funded by their founders. They answer only to themselves and don’t need to worry about outside investors seeking a return on investment.

Other firms that have venture funding tell me (A) they are well funded to ride out the recession and (B) they’re in no rush to sell out. In fact, many of those venture-funded firms are cash flow positive, meaning their balance sheets are getting stronger and stronger each quarter.

Lots of Wild Cards

Still, I think we’re going to see M&A activity based on two potential scenarios:

1. PSA (professional services automation) Meets Remote Monitoring: Yes, a growing number of MSPs use PSA software (Autotask, ConnectWise, TigerPaw, etc.) in combination with remote monitoring software (Kaseya, Level Platforms, N-able, Dell Silverback, etc.).

If one PSA company was to acquire one remote monitoring company (or vice versa), I believe it would set off a chain reaction/buying frenzy. Every CEO in the industry would instantly need to reconsider their competitive position, and competitive options.

Why haven’t we seen a PSA/Remote Monitoring merger in this area yet? Two reasons: Price and personality.

As my dad (a real estate pro) always said: Everything is for sale, it’s just about negotiating a price. Most MSP software providers haven’t sold out because their management teams genuinely enjoy building companies, and they see multi-billion-dollar opportunities ahead.

It’s like playing Deal or No Deal. Industry CEOs still see big money on the board, and they don’t want to sell out too early at too low a price. But the recession could impact that optimism a bit, and bring partners or rivals to the negotiating table.

In the MSP market, things get extra complicated when you throw in the personalities. Just about every MSP software provider has a strong-willed CEO who has shaped the company in his image. Can you image ConnectWise’s Bellini reporting to Kaseya CEO Gerald Blackie — or vice versa?

That’s like asking Richard Petty to take his hands off the wheel and sit in the back seat.

2. Microsoft or Cisco Come Calling

Now for the other M&A scenario. I could be wrong, but I’m still convinced Microsoft will enter the managed services software market at some point.

The company already has close working relationships with MSP software providers. And with Windows 7’s launch just around the corner, it would make perfect sense for Microsoft to get even more serious about a managed services move.

Back in the 1990s, Microsoft launched Systems Management Server  (SMS) to help businesses deploy and manage Windows NT and Windows 95 systems.

Fast forward to the present, and Microsoft could repeat that strategy in the managed services market — either launching or acquiring a tool to help MSPs remotely deploy and troubleshoot Windows 7 systems.

I’ve been hearing rumors about Microsoft launching its own tool since October 2008. I’m convinved something is brewing in Microsoft R&D or Microsoft M&A…

Meanwhile, Cisco Systems continues to bolster its Cisco Powered Managed Services initiative. I don’t think Cisco is very interested in MSP management tools that serve small businesses. But I do think the IT giant is taking a close look at MSP tools that serve midsize and large companies.

Remember: Massive service providers like Verizon Business and AT&T are introducing managed unified communications, managed security and other services built around Avaya, Cisco, Juniper and Nortel technologies. To build more market share, Cisco may want to leverage new tools that help big service providers better manage those customer systems.

I firmly believe consolidation is coming this year. It’s just a matter of who fires the first shot. And when.

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