Record-Setting M&A Pace: Advantageous or a Detriment to Channel?
We paid particular attention to how the surge of M&A activity is impacting MSPs.
February 7, 2022
![M&A M&A](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/bltddf720dc2a453376/65243698d3a7fe0594545ca3/MA.jpg?width=700&auto=webp&quality=80&disable=upscale)
Shutterstock
Outside of the global M&A surge, there are specific issues unique to MSPs that drive the M&A boost. Scott Barlow is VP of global MSP and cloud alliances at Sophos. He said owner retirement, regional or geographic expansion, complementary services and vertical expansion have all played a role in fostering deals.
Cybersecurity is also a factor.
Out of 489 cybersecurity professionals surveyed by Information Systems Security Association International, 95% of respondents said the cybersecurity skills shortage and its affiliated impacts have not improved over the past few years, and 44% say it has only gotten worse. This ultimately influences M&A.
“We see an acceleration of M&A due to the global shortage of qualified resources as cybersecurity threats advance globally,” Barlow said. “I think the current growth and momentum in M&A deals will positively impact the MSP industry. Many MSPs are inherently more focused on the technology, so when an M&A occurs, it’s a net positive for both organizations and creates greater synergy.”
Fred Voccola is CEO of Kaseya. He agrees that cybersecurity concerns are propelling M&A activity.
“The technology economy is growing so fast, so much faster than the non-technology economy, that even in the private equity world, there is a labor shortage. Today, we’re finding, as an operator of a large software company, one of our biggest challenges is hiring and developing great people.”
He said this is not any different in the world of private equity.
“The number of experienced people who have software, technology and technology distribution experience is still relatively small,” Voccola said. “So, over the next several years, as more and more financial experts and the private equity community get experience, you’ll find them doing more asset allocation to that category. Additional money will be put into software, internet and the technology services sector. It’s the best place to get the highest return, for private equity of all kinds, venture, growth and buyout.”
He added: “The larger MSPs typically have a higher growth rate and higher profit margin than smaller MSPs, which is usually not the case in most industries. It doesn’t mean small MSPs are not doing well. This macro trend of small to midsize businesses around the world, digitally transforming and spending more on technology, is allowing all boats to rise in the channel – small, medium, large – everyone is going to do better. However, MSPs large enough to have dedicated professionals to work on the business means that dedicated sales and marketing professionals, service delivery architects and financial professionals, will do better.”
Frank Rauch is head of worldwide channel sales at Check Point Software Technologies. He said the infusion of private equity capital allows MSPs to follow a hot market.
“Starting up an MSP is a heavy lift sometimes,” Rauch said. “What we are getting are calls from partners who were with HPE or VMware or in the App Dev space, now dabbling in security and now investing in the security practice.”
He added: “New money flowing into the channel is always a good thing. Consolidation is interesting when it makes sense, but when there is [customer] overlap, it is not interesting to vendors. It is so much more valuable from a vendor perspective if it expands the total addressable market with the partners and expands the offerings we can sell.”
Beyond the flow of capital, private equity also brings one factor experts say is necessary for the channel: structure.
Arlin Sorensen is VP of brand and ecosystem evangelism at ConnectWise.
“Private equity and the growth it brings to our channel has a lot of value. They create the need for strong governance through the discipline of a board of directors and the reporting and communication required for ongoing operations,” Sorensen said. “With significant growth in these private-equity-owned companies, employees also have many more options for a career path and upward mobility. Those are not available in many smaller companies. These larger entities can also provide more benefits and other employee perks making a better working environment.”
However, structure isn’t unidirectional. Private equity firms also benefit from the financial infrastructure MSPs provide them. MSPs are learning the importance of contracts and recurring revenue as it applies to value. Several successful MSPs are signing customers up for contracts instead of the pay-as-you-go model. When revenue streams are predictable, private equity values MSPs much higher.
Of course, the traditional agent channel hasn’t been void of consolidation and private equity either.
Craig Schlagbaum, SVP and channel chief at Comcast Business, said the business model going forward will foster more growth for vendors.
“I am obviously thinking of it more from the agent side of the business, but this is the highest level of M&A activity I have ever seen. There was a great deal of pent-up demand for those willing to sell, and my guess is there are many we don’t know about that haven’t announced.”
Regarding private equity, he added: “More share goes through the channel and more value comes into play. Our [channel] sales have hit an all-time high and we are seeing some of the biggest deals we have ever done.”
For Comcast, that means getting more partners interested in the company.
“We are getting more inquiries than in the past because what starts with a communications sale then moves to solutions to secure it, to software-defined solutions to the cloud, and then you need a network provider that is world-class. Partners moved from a world of strict commodities to selling solutions. Now they are selling the whole ensemble,” Schlagbaum said.
Craig Patterson is channel chief and vice president of sales, Americas, at Aryaka.
“The [recent] investment validates and fuels the channel model for technology services,” Patterson said. “More and more business customers are buying technology services from third-party trusted advisers, which aligns with Aryaka’s 100% channel-led strategy.”
This monetary environment has given rise to “super agents,” or agents coming together to earn a private equity investment.
“The emergence of super agents is a positive for the industry in general by consolidating subagents into more strategic organizations and giving subagents an opportunity to participate in equity and upside,” Patterson added. “That said, the super agents that are acquiring subagents face challenges themselves. A lot of subagents are lone wolves who are used to working on their own. It will be hard to pull dozens of subagents together to form a corporate structure wherein they all operate from the same playbook. Going forward, I think you will see a few super agents emerge by acquiring subagents, but there will be challenges in consolidating those subagents under one corporate umbrella.”
Not everyone is enamored by the inpouring of capital.
Robert Cooper is Wildix’s managing director for the Americas. He said that despite the growth of private equity spending, several MSPs have seen their business equity pulled out.
“I think a lot of the M&A within the MSP community is being driven by the fact that many MSPs are being driven out of the business. There are players that have come into the market that are now sucking the value out of the channel, sucking all the business equity out of the MSPs. As they have begun to really drain the swamp, if you will, they have really put the hurt on a lot of MSPs.”
Cooper added: “We’re going to be in a time of crisis and inflation, and I think money will become tighter. Many people have already begun that shift to a monthly recurring revenue (MRR) or an opex model, and so cash is not as high in the bank as it used to be. But now they have recurring revenue, so their valuations are going to be better. Now is a good time for them to think about moving. So I think you’re going to see many [MSPs] look at that. You’re going to see some bigger players trying to get bigger to compete.”
Much of this “unprecedent growth” in the channel will occur around cloud technology. This is the opinion of Joseph Landes, CRO of Nerdio, a firm that provides Azure Virtual Desktop provisioning and management services delivered by MSPs. Landes spends much of his time with MSPs who deliver Microsoft Azure and Microsoft 365 managed services, as well as cloud VDI.
“It’s very interesting to open up LinkedIn every day and see the new acquisition, or the new merger or whatever. We’ve certainly had partners that we’ve worked with that have been bought by other companies or have bought other companies,” he said.
Landes underscored that Nerdio itself spun out of an MSP two years ago. Whether a company is acquired may depend on whether its technology is cloud-based.
“So it’s not new to us,” Landes said. “The part of the value chain that I really focus on in the MSP space is getting people to move to the cloud, because I think that if you’re an MSP and you’re just going to Dell and HPE and buying a server, you’re really going to get left behind, because that’s just the old technology and people don’t want to do that anymore. I think whether you’re or an MSP that just got bought or you’re buying someone else, that’s the direction you need to head in or you’re going to be disadvantaged.”
Landes didn’t hold back on his assessment.
“Every time that I’ve talked to an MSP who’s been acquired, it feels more like an exit than anything else, not a massive transformational step forward,” he said.
Much of this “unprecedent growth” in the channel will occur around cloud technology. This is the opinion of Joseph Landes, CRO of Nerdio, a firm that provides Azure Virtual Desktop provisioning and management services delivered by MSPs. Landes spends much of his time with MSPs who deliver Microsoft Azure and Microsoft 365 managed services, as well as cloud VDI.
“It’s very interesting to open up LinkedIn every day and see the new acquisition, or the new merger or whatever. We’ve certainly had partners that we’ve worked with that have been bought by other companies or have bought other companies,” he said.
Landes underscored that Nerdio itself spun out of an MSP two years ago. Whether a company is acquired may depend on whether its technology is cloud-based.
“So it’s not new to us,” Landes said. “The part of the value chain that I really focus on in the MSP space is getting people to move to the cloud, because I think that if you’re an MSP and you’re just going to Dell and HPE and buying a server, you’re really going to get left behind, because that’s just the old technology and people don’t want to do that anymore. I think whether you’re or an MSP that just got bought or you’re buying someone else, that’s the direction you need to head in or you’re going to be disadvantaged.”
Landes didn’t hold back on his assessment.
“Every time that I’ve talked to an MSP who’s been acquired, it feels more like an exit than anything else, not a massive transformational step forward,” he said.
M&A activity among partner businesses is on pace to be greater this year than in 2021 — and for that matter, in history. Anecdotally speaking, the inboxes at Channel Futures are full of announcements of multimillion dollar deals, and many of those are funded by private equity. And according to the top channel execs we’ve interviewed for this story, our editorial intuition may be correct: The activity in 2022 could well out pace last year’s. As businesses consolidate, they can innovate more in areas such as cloud, security, data and artificial intelligence. This can fuel further growth and financial gains.
However, understanding the influx of M&A activity among partner businesses means putting it into context globally.
The Big Picture
It’s not just solution providers experiencing rapid M&A expansion. The third quarter of 2021 was the highest on record for global M&A value. It reached $4.28 trillion in the first nine months of the year alone. For context, the previous all-time annual record was $3.96 trillion set in 2015. By the fourth quarter of 2021, M&A and related activity surpassed $5 trillion, the first time on record.
The majority of deals in 2021 were found in the technology, financial services, industrials and energy sectors. The deals were led primarily by corporates, private equity and SPACs, or special purpose acquisition companies. The massive uptick was aided by monetary policies and certain financial conditions, including low interest rates, making M&As more favorable. Also, many players put off large transactions in 2020 due to the strain of the pandemic, but were ready to strike in 2021. According to international law firm Case,” lenders were in a better position to assess the resilience of businesses after 18 months of the pandemic and were looking for a home. They had a greater degree of comfort identifying the right credits and put their money to work.”
It also appears tech giants might have set the pace for smaller technology companies’ M&A actions. CNBC reports that Microsoft, Amazon and Alphabet “announced more deals in 2021 than any other year in the past decade.” This may be because they are undeterred by potential legal action that would block these acquisitions.
The Future
As for how this activity is affecting the channel, we spoke to eight experts representing MSPs, agents, resellers, vendors and cloud service providers to gauge their reactions to the dramatic increase of M&A deals. Channel Futures paid particular attention to how the surge of M&As is affecting MSPs. That industry may be experiencing the greatest number of deals within the channel.
By the end of this decade, seven out of 10 small IT shops will outsource some, or all, of their IT to MSPs. So says Kaseya CEO Fred Voccola. This opens a market about twice as large as the market they currently serve. Expect to see lots of consolidation because, with MSPs, economies of scale can be obtained through acquisitions. Larger MSPs have a typically higher growth rate and higher profit margin than smaller MSPs. This is not the case for most industries, the experts said.
Check out our slideshow above to read more of the dialogue from the experts.
Want to contact the author directly about this story? Have ideas for a follow-up article? Email Claudia Adrien or connect with her on LinkedIn. |
About the Author(s)
You May Also Like