The State of M&A: What Does Vendor Consolidation Mean for Partners?
Merged vendors are drafting new partner agreements more frequently than ever.
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Consolidation impacts partners in a variety of ways – the foremost being compensation. Alan Sandler, founder and managing partner at Sandler Partners, described a cycle that other experts agreed reflect what is happening in UCaaS and what might happen in other technologies. In that cycle, entrants flood a vendor landscape offering lucrative sales incentives and commissions to partners in order to gain market share. But ultimately, the larger players gobble up the smaller players, leaving a much less crowded field. Then compensation comes back to normal, or even comes crashing down.
“As consolidation occurs, companies get swallowed up and layoffs occur. You start to see the large SPIFFs go away. You even see commissions starting to drop. That means there’s less money in the marketplace, and the TSD is put in a weaker position to negotiate better agreements and commissions,” said Sandler, adding that partners will need to look to their TSD partners to negotiate strong contracts.
JS Group CEO Janet Schijns said when private equity or venture capital conducts M&A, they’re eyeing a 4.7-5.3x return on their money.
“One of the easiest ways to do that is to reduce residual compensation,” she said.
Schijns advised that partners look at what accretive services they can add in the event their vendors reduce compensation.
“If you don’t, when they make that merge, your cash flow could immediately go down,” she said.
Those examining vendor M&A will find it helpful to categorize the topic by technology. The four technology buckets Channel Futures examined – network, UCaaS, CX/CCaaS and cybersecurity – compare differently to one another in terms of market saturation, acquisition drivers and the actual pace of M&A.
However, it may help to start with unified communications as a service (UCaaS), which has created such a wealth of opportunities for channel partners in the last five years. And for some partners and industry insiders, what we’re seeing in UCaaS M&A sets a pattern for other technologies.
It’s no secret that UCaaS vendors have been offering massive upfront SPIFFs to agents that sell that platforms. On one hand, newer partners have seen those incentives as a godsend as they try to build their monthly recurring commissions.
On the other hand, those SPIFFs won’t last forever. According to experts, those SPIFFs help function to gain market share in a crowded landscape. Curt Allen, managing partner at X4 Advisors and strategic advisor at Bluewave Technology Group, said rationalization was inevitably going to come to the UCaaS sales model to bring those vendors closer to the software rule of 40.
“The UCaaS magic trick is turning 85% gross profit into 4% by paying five people on every deal,” Allen told Channel Futures.
Eric Ludwig, co-founder of RISE Technology Advisors, said Microsoft’s shadow looms heavily over the UCaaS industry. The vendors that are surviving, he said, are those like CallTower that have embraced integration.
“Microsoft’s technology and adoption are so disruptive that you can’t be a small UC player,” Ludwig told Channel Futures.
As a result, M&A is the inevitable outcome for many of these vendors.
“Right now the UC M&A is occurring so that they can survive,” Ludwig said.
The contact center/customer experience space in some respects resembles its UCaaS contemporary. Although not many mergers have occurred — save the failed Zoom/Five9 marriage.
But that could change soon.
“I think you’re about to see more M&A in that space,” Ludwig said. “The Five9 acquisition was a big one, but they bailed out, and and now Zoom is building it. There can’t be that many contact center players.”
In other words, look for the CCaaS market to think out significantly in the upcoming two years.
But channel insiders are quick to draw a distinction between how CCaaS and UCaaS providers are conducting M&A.
For one, Schijns said CCaaS looks like more of a buyer’s market compared to the UCaaS seller’s market.
Moreover, she said CCaaS platforms see multiple adjacent technological areas where they can purchases to complement their offerings. There’s much more to it than buying customer bases.
The complexity of these enterprise-focused CCaaS deals are creating the need to cover a growing list of parts.
“It’s a bigger solution. And so I think we’re starting to see the folks that want to stand up as the CCaaS providers starting to snatch up pieces that make their solution more complete,” Schijns said.
In addition to the focus on buying “solution strength,” CCaaS acquirers may view the UCaaS SPIFF saga as a cautionary tale, Schijns said.
“I think the market-share buying game is over. I think [private equity/venture capital] has realized that’s a dangerous game and doesn’t last, because you’re mostly software-as-a-service solutions now. And it’s easier for people to switch. There aren’t the big switching barriers there used to be,” she said.
Alan Sandler (pictured) said he sees cybersecurity suppliers move in a similar pattern to how the UCaaS players have operated with regard to consolidation. That is, plenteous partner sales incentives to drive market share, followed by consolidation and compressed compensation.
“There are already over 500 new cybersecurity offerings and seemingly a new one every day. The new companies are going to need to show revenue to justify their valuations to investors and the public markets,” Sandler told Channel Futures. “To generate the attention of selling partners, with so much ‘noise’ in the space, the security companies will reach out offering better commissions and higher SPIFFs to attract interest from partners. We keep seeing those cycles in the constantly evolving cloud tech space.”
Much of this discussion has focused on partner compensation. But how do end customers view vendor consolidation?
Eric Ludwig (pictured) said many customers, especially those at the enterprise level, factor M&A heavily into purchasing decisions. Namely, many want assurance that the platform they sell will still be around by the end of their contract.
For example, Ludwig said one large customer turned down a deal involving a network services provider. Their concern: A private equity investor owned the vendor.
“The client said, ‘I will not buy from this company because they’re owned by PE and I want to a five-year deal. And I know that they’ll be sold but before the time my contract expires,'” Ludwig said. “They think about those things.”
On the other hand, Ludwig’s team closed a NICE InContact deal with an enterprise customer that was looking for stability. These former Intrado customers had been impacted by Intrado’s sale of its customer base to Fusion Connect and the resulting end of Intrado’s proprietary platform.
As a result, customers wanted to know if Nice would be bought.
“They didn’t want to find themselves in the same position within that next contract period. And NICE was a good fit because they’re well-capitalized, they’ve got great financials, they’ve got a strong leadership, they’ve made a commitment to the contact center market, both in the services and in the product space, and they’re not laying people off,” Ludwig said. “That’s big for a lot of clients and for us as partners, depending upon what that client needs and where they lie.”
Ludwig summed up five categories that partners should help their customers understand as leadership, investments, resources, service levels and financial.
“What am I going to pay, and are they going to be able to support me the way they have? Those are five really important parts that we ask and clients should ask,” Ludwig said.
The oft-repeated phrase goes that the channel is a people-and-relationships business. Partners tend to build close relationships with individuals at TSDs and vendors so that they can escalate problem to through those people.
But what if those people leave?
Ludwig said each acquisition is different in terms of which people from the purchased company remain at the combined organization.
He pointed to the example of CenturyLink buying Level 3. Some Level 3 channel leaders remain, but many have left in recent years.
Ludwig noted that many executives at publicly traded companies get a change-in-control mechanism in their contract. Those often provide juicy benefits in the event that the executive chooses to move on to a different company.
In cases where technology drives the acquisition, you may expect to see many people from the purchased organization leave. In cases where the buyer sees people and clients as the key targets, it will use earn-outs to keep those employees engaged at the combined company.
Does a vendor being an acquisition target present too much risk for customers?
Ludwig said it depends. For industries like network/WAN and colocation that face commodization, it makes sense to take note of which vendors are going to be buyers. For example, network M&A often revolves around “better managing negative levers” rather than actual technological upgrades, he said.
But depending on the technology category, one might need to buy the smaller fish. He pointed to cybersecurity as an emerging technology where partners need to find very specific solutions to their customers’ needs.
“You have to go into these more niche suppliers if you’re going to find the right partner to fix the client problem,” he said.
If partners and customers worry about the cybersecurity vendor getting bought, they could turn to publicly traded cybersecurity providers like Akamai and Cloudflare. But even then, an even bigger fish could buy those vendors to subsume them into a larger platform.
“There’s absolutely an expectation for clients, as well as for partners, that if you’re not at the very top of the food chain, that you’re going to get bought,” Ludwig said. “That’s OK. Because the technology that they have is so much better than everybody else’s that it’s worth buying.”
Janet Schijns said her consultancy has advised partners on whether they should accept new contracts that consolidated suppliers put in front of them. Instances of vendors implementing new contracts post-merger have increased, she said.
“A few years ago, it was less frequent. It was about 30-40% of the time. Now it’s 60-70% of the time, so it’s trending toward more frequently. And the reason it’s trending toward more frequently is that people overpaid and then the economy went in a tough direction,” she said. “And you can lay people off. You can reduce marketing expenses, and you can reduce compensation.”
In one instance, the vendor sought to remove monthly recurring commissions. Schijns recommended that the partner check with a lawyer to see if they needed to adopt the new agreement. It turns out they didn’t need to.
“You might have signed an agreement that says, ‘We agree that you can change this at any time,’ but you might not have,” she said.
Schijns (pictured) is urging partners to take control of their vendor relationships. She has recommend that partners “down-select” those vendors they view as truly strategic. With those re-focused priorities in mind, partners should view themselves as a customer of those vendors. And if they are the customer, they have every right to dictate more of the terms.
“Then when the M&A happens, if it’s one of your strategic partners, you’re going to have a more strategic relationship already and be able to kind of survive the early days, because you’ll be already in a bit of a driver’s seat,” Schijns said. “Don’t be a willing victim.”
One can only prepare so well for vendor consolidation. Curt Allen (pictured) said that unpredictablity reigns.
“You just don’t know. We can predict on kind of what some of the motions have happened today. But you can’t count on anything. When you work for someone else, just know their business is for sale. Everybody has a price,” he said.
He added that he views one trend as constant: that despite consolidation, customers will continue rely on the channel for their technology needs.
He encouraged partners to “make your career reslient.”
“No matter what you do for a living – network,” he said.
One can only prepare so well for vendor consolidation. Curt Allen (pictured) said that unpredictablity reigns.
“You just don’t know. We can predict on kind of what some of the motions have happened today. But you can’t count on anything. When you work for someone else, just know their business is for sale. Everybody has a price,” he said.
He added that he views one trend as constant: that despite consolidation, customers will continue rely on the channel for their technology needs.
He encouraged partners to “make your career reslient.”
“No matter what you do for a living – network,” he said.
Partners face compensation reduction, contract revisions and personnel turnover as vendor consolidation sweeps across the channel.
Inorganic growth is a natural part of life for people in the channel. Many partners experienced consolidation during their careers at suppliers, and today they express little surprise at seeing their vendor partners merge.
JS Group’s Janet Schijns
JS Group CEO Janet Schijns said M&A will continue among vendors, albeit functioning more as a buyer’s market than as a seller’s market. She said channel history serves as a guide for how consolidation may occur, specifically within the tech services distributor (TSD) channel. Specifically, history tells us that the number of vendors will ultimately grow smaller, not larger.
“If you look at some of the TSDs, they might have 55 vendors in a specific area,” Schijns told Channel Futures. “That’s not going to hold. We saw that in the IT industry. The IT industry collapsed categories years ago, folding into one big vendor or two big vendors.”
Different Technologies
Vendor consolidation has disrupted UCaaS in a big way, with massive increases in sales incentives in the months leading up to acquisition and subsequent decreases in compensation following M&A. Moreover, channel insiders say that pattern of disruption may come to CCaaS and cybersecurity soon. However, they note that those two industries may see a different rhyme and reason, as well as financial implications, to their deals.
Partners will need to weigh compensation changes as well as many other topics as they try to serve end users whose platforms might be undergoing consolidation. Channel Futures spoke to Schijns and three other channel veterans about how partners can wisely guide customers and their own teams through vendor M&A. They spoke predominantly about how technology advisors (agents) are seeing an impact, but offered advice that MSPs and VARs can also find helpful.
Channel Futures will continue this three-part series with articles about respective consolidation occurring among distributors and customer-facing partners.
Scroll through the 10 images above to see insights about what is happening in supplier M&A and what partners should do about it.
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