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In the current environment, the impetus for market consolidation deals is more pressing than ever.
September 4, 2020
Sponsored by Kaseya
Joining forces for greater efficiencies, growing by gobbling up smaller competitors or complementary firms, cashing out when you can’t cover the bills … there are numerous reasons a company may go the mergers and acquisition route in any economy. But in the current topsy-turvy environment, the stakes are higher and the impetus for market consolidation deals more pressing than ever.
The MSP industry is no stranger to mergers and acquisitions. According to IT Glue’s 2020 Global MSP Benchmark Report, in 2019 more than two-thirds of MSPs were considering being acquired, while nearly 20% were considering making a purchase themselves. But with COVID-19’s wide-ranging impact on MSPs and their customers, it’s no surprise to see many firms considering their options.
Meeting Increased Demand
Consolidation within a maturing market is nothing new. MSP offerings are in high demand, thanks to an increased reliance on IT services in every industry and the unfortunately growing need to protect firms from cyberthreats while meeting stringent compliance standards and regulations. That has fueled rapid growth as more organizations look to outsource some of their essential IT services to MSPs.
Although most MSPs are thrilled to increase their monthly recurring revenue (MRR), that doesn’t come for free. The broadening array of services MSPs offer can also make market consolidation through M&A more attractive. Endpoint management and looking after Office365 and cloud instances on behalf of clients is now just the tip of the iceberg.
From Dark Web monitoring to disaster recovery as a service to monitoring for footholds, MSP menus keep growing as customer environments become more complex and cybercriminals get craftier. This creates an ongoing challenge of identifying, hiring, and training talent for these roles and increasing the organizational overhead that comes with a higher headcount.
Continuing to diversify what MSPs offer; effectively communicating, marketing and selling those solutions; and then standing them up and supporting them takes time, training and expertise that is sometimes in short supply. Strategic acquisitions or mergers can accelerate an MSP’s ability to offer more and instantly expand its workforce.
Downward Pricing Pressure
Meanwhile, both new and established players are eager to grab their piece of the pie, which has increased competition and, in some cases, driven down prices. For those with more efficient operations, those economies of scale can support more aggressive pricing that might make the reduced margins untenable for smaller MSPs.
This puts smaller MSPs in a tough spot. Their hard-won accounts are ripe for poaching by more aggressive competitors, but they don’t have the wiggle room to drop their own prices or throw in extra services without taking a serious margin hit. Pre-COVID-19 strategies of taking on debt or accelerating hiring are also less viable now for some MSPs.
Pandemics aren’t picky when it comes to devastating previously prosperous businesses, and, depending on which verticals and geographic areas an MSP was operating in, plenty of accounts may be in jeopardy or unable to pay their bills.
Additionally, government-backed programs such as the Paycheck Protection Program (PPP) loans and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the United States that temporarily propped up businesses have run out–with no economic recovery in sight.
This uncertain future for MSPs and their clients could prove devastating in some corners of the industry; some MSPs may end up looking for an exit while others with deeper capital reserves might find themselves in a buyer’s market.
COVID-19 hasn’t been all bad news for the IT industry. The sudden shift to work from home slammed down the accelerator on the remote work revolution. Industries and companies previously reticent to permit this practice have had to embrace it–at least temporarily–and some may never go back to the way it was before.
Even if organizations don’t continue to offer remote work regularly, they must continue this practice for the immediate future and will likely retain some level of flexibility going forward. Maintaining a robust and secure IT environment with a distributed workforce should continue to be a good thing for MSPs for the foreseeable future.
Strength in Numbers
Buyers in this market are focused on growth–whether it’s expanding their offering, snapping up additional clients, or acquiring the talent they need to service their expanding clientele.
Attractive targets fill in the gaps or build upon what they’re already doing. Whether it’s creating a vertical stack, moving into a new region, or bolstering their non-technical expertise such as sales and marketing, bigger is generally better.
Further stirring the pot are the private equity and individual investors tracking this market; they’ve got money to spend are angling to buy low in an industry that has demonstrated exceptional growth and shouldn’t see a long-term hit from this crisis and may actually benefit from it.
Preparing for M&A
MSPs should always be taking stock of themselves, but it’s more prudent than ever to look inward and size things up. With valuations a little lower than usual, MSPs should recognize potential weaknesses and see what can be addressed to make themselves more attractive or improve their chances to remain a viable, independent business.
Here are five areas to consider:
Talent: What skills are currently in-house, what’s lacking and who’s a flight risk. With so many people out of work, it’s a good time to add the right staff if possible.
Breadth of capabilities: Customers want and need a broader portfolio of services than ever before from their MSPs. What boxes are currently checked, and which could be added with training, a strategic hire or additional tools from vendors?
Differentiator: What makes your MSP special? Is it expertise in a particular vertical market? A compelling regional footprint? Desirable anchor clients? What’s your elevator pitch?
Scalability: To survive and thrive, MSPs must be able to serve more customers and offer more solutions with fewer resources. What technology platforms and training programs are in place to make that feasible? Is it a hodgepodge of point solutions or a fully integrated dashboard and command center for everything?
Tipping point: What’s the magic number that means you’re willing to make a deal? How bad can things get before you’ve got to get desperate? How low must an acquisition target go for you to take the plunge and spend versus save? It’s better to figure these things out well before a deal is on the table to take the emotion and urgency out of the decision-making process.
If there’s one thing 2020 has taught us, it’s to expect the unexpected. Opportunities may arise and crises may occur, but with a little introspection and investment in shoring up weaknesses, MSPs are still in a great position to thrive on their own or join forces for greater things.
Jim Lippie is GM & SVP Partner Development.
This guest blog is part of a Channel Futures sponsorship.
Read more about:MSPs
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