The Doyle Report: Mergers, Recapitalization and Deal Making Is Changing the Channel Landscape

By now you may have heard that one of the more prominent MSPs in the market has been acquired. On Dec. 1, Internet & Telephone, LLC. announced that it purchased Jenaly Technology Group. While terms were not disclosed, the transaction won’t rate among the biggest deals of 2015. But it may rank among the more important—if not emblematic.

This is because the founder and president of Jenaly, M.J. Shoer, sits atop the board of directors at CompTIA, the largest and most influential trade association for solution providers in the industry. Despite his company’s relatively modest size, Shoer plays an outsized role in the industry. He’s been an advocate of the MSP business model, and a thought leader in the broader industry as a whole.

So what does it say when one of the more prominent business owners in the MSP market decides to sell his company? It says the market is shifting—though exactly where is a matter of debate.

Lest you think I’m basing this Doyle Report report on a single transaction, let me assure you I’m not. In addition to the Internet & Telephone deal, PCM closed its previously announced deal to acquire millions of dollars worth of assets from Systemax on Dec 1. This follows PCM’s March 2015 purchase of En Pointe Technologies Sales, one of the nation’s largest IT solutions providers. Also this week, GTCR, a leading private equity firm, announced plans to buy Park Place Technologies, a third-party maintenance (TPM) provider that provides post-warranty data center maintenance services to clients in more than 70 countries. Not to put too fine a point on things, Presidio bought Sequoia Worldwide this week, which will help jumpstart its work with private and hybrid cloud solutions.

So yeah, the landscape is shifting.

Truth be told, it has been shifting for quite some time. If you compare the 2015 Talkin ‘Cloud list to previous years, you will note that a number of companies have been snapped up by bigger organizations. Take one of cloud computing’s bright stars from the 2014 Talkin’ Cloud 100 list, BUMI. In September 2014, the premium MSP that specializes in online data backup and recovery was acquired by J2 Global, which is No. 13 on this year’s Talkin’ Cloud 100 list. Other Talkin’ Cloud 100 companies that have been acquired include Arkadin (bought by NTT), Claris Networks (TekLinks), Perspecsys (Blue Coat), TestudoData (Excel Micro) and Unified Technologies (DCSI).

While some deals are being funded by tech companies themselves, a good many are being underwritten by private equity companies. For perspective on what’s going on, I turned to several thought leaders familiar with M&A activity in the channel. This includes Arnie Bellini, the founder and CEO at ConnectWise. In a recent interview with MSPmentor, Bellini attributed the rise in the number of deals to a changing of the guard under way in the industry. Many entrepreneurs who got into the business in the 1980s and 1990s have already paid off their mortgages, put their kids through college and funded their retirements. The idea of changing business models, embracing new technology or transforming their workforces is daunting, especially if someone else is willing to pay a premium for their businesses now.

“The change underway underscores the vibrancy and competitiveness of this market,” Bellini says. “As old companies move out, new ones come in and the market gets stonger as a result.”

Martin Wolf, the principal of martinwolf, an M&A Advisory company focused on mid-market companies in the IT services, supply chain and Software as a Service (SaaS) space, sees things somewhat differently. Since 1997, Wolf’s company has participated in more than 140 transactions in nineteen countries. Rarely has he seen more business owners choosing to recapitalize their businesses than now.

“I don’t believe we’re witnessing a bunch of guys looking to retire and cash out—not the way the trend is being portrayed,” Wolf says. Instead, he sees more companies gearing up to meet customers’ cloud demands. Case in point: NWN Corp., which, after completing several acquisitions of its own, accepted an investment from New State Capital Partners in October 2015.

In an interview, NWN President and CEO Mont Phelps says he felt compelled to recapitalize his business after realizing just how much cloud computing has accelerated the rate of change in the industry. A relative newcomer to the IT market, he has seen first hand what disruptive technologies and business models have done to other industries. To avoid disruption, he’s positioned NWN to make changes whenever it needs to.

“In past years, IT companies could afford to run alongside a steam locomotive or stand at station and decide whether to get on or not,” he says. “But now everyone is dealing with a bullet train.” Not to mix metaphors, he notes “there are no saber tooth tigers in my yard.”

“The big and the strong are as vulnerable today as any company today. As in nature, thriving in today’s market will come down to what Darwin discovered was the key, adaptability,” says Phelps.

Trying to determine how many companies are up for sale or interested in acquiring new assets is difficult. But anecdotal evidence says it’s rarely been so many. Tony Francisco, founder and CEO of VAR Dynamics, a born-in-the-cloud, “click-to-provision hosted services company,” has worked with scores VARs and MSPs over the last decade. Never has he heard so much talk of change.

“The industry will see massive consolidation among MSPs,” he says. “This will result in [companies] that have standardized MSP practices as opposed to a conglomeration of mom and pop companies doing things independently without any way to automate or scale their operations.”

Businesses looking to acquire complementary companies have found willing sellers, but not the bargain-rack prices that IT solutions companies sold for a few years ago. When it comes to valuations, bigger businesses are getting better valuations, according to Wolf and others. For many, evaluations ranging between 5-8 times EBITDA are not out of the question. Those still in growth mode—i.e. not yet profitable—are hoping for offers in the range of two-times revenue.

While some business owners have cashed out and left their businesses, many have remained. Shoer plans to remain at Internet & Telephone and will serve as the company’s CTO. Similarly, Phelps says he will stay on to run NWN.

While acquisitions can be transformative (not to mention lucrative) they can also be draining when anticipated synergies don’t materialize. This happens for a variety of reasons. Sometimes personalities or cultures don’t mesh. Other times offerings don’t fit or complement each other as hoped. Mona Abutaleb has seen this play out both ways. Abutaleb is the president and CEO of mindSHIFT, and the senior vice president of services for Ricoh Americas Corporation.

If you’re not familiar with mindSHIFT, it has an interesting history. Formed in 1999, the company was one of the first IT solution providers to build a business based solely on recurring revenue. Like many MSPs, it enjoyed healthy growth in the 2000s. It grew both by organic expansion and through acquisition. In 2012, it acquired White Glove Technologies. The deal enabled mindSHIFT to expand its geographic footprint beyond its East Coast origins to key markets in Texas including Austin, Dallas-Fort Worth, Houston and San Antonio.

In addition to being an acquirer, mindSHIFT has also been an acquiree—twice in fact. In 2011, the company was purchased by Best Buy as part of the retailer’s expansion into services. But the higher-end services that mindSHIFT offered didn’t fit well into Best Buy’s portfolio. So Best Buy sold the company to Ricoh just two years after acquiring it.

“The last 18 months have been phenomenal,” says Abutaleb, who has been with mindSHIFT for more than a decade. “Ricoh is a perfect match.”

Where Best Buy couldn’t leverage mindSHIFT’s expertise, Ricoh has prevailed, Abutaleb says. The two companies have integrated their offerings and worked creatively to position Ricoh as more than a supplier of print products and services. “Our goal is to help our customers manage their information,” she says. Together with Ricoh, mindSHIFT leaders believe they can achieve that goal more readily.

When asked for his perspective, former MSP owner and current Penton Technology Industry Expert Jim Lippie says both Bellini and Wolf have valid points of view. And he should know. He, after all, ran a successful MSP, Thrive Networks, which he sold to Staples. After Thrive, Lippie then served as President of IndependenceIT, a DaaS company that empowered MSPs. As the chief advisor at Clarity Channel Advisors, a platform and advisory company, he works everyday with MSPs to improve their business efficiencies and volumes. Which MSPs are buying businesses and which are selling operations is something he tracks closely.

Looking at the market as whole, it’s clear that the prototype business model of the future has not yet emerged. Most deals, in other words, are simply plays for scale. But Lippie says that may change.

“I haven’t seen the definitive equivalent of the next ‘killer app’ emerge. But I have heard some rumblings that could change my mind,” he says.