Canalys explains why it's expecting double-digit MSP M&A growth this year.

Esther Shein, Contributing Editor

March 6, 2024

5 Min Read
MSP M&A hot
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Three months in, and already 2024 is seeing several MSP acquisitions, with the latest announcements coming from Netsurit, which acquired iTeam Consulting, and Summit acquiring managed data center provider Deft.

The acquisition of Deft is the third Summit has made in the past year-and-a-half, according to Summit in announcing the deal. Under the terms of the agreement, Deft founder Jordan Lowe will become chief strategy officer and co-founder Daniel Brosk will stay on as chief operating officer.

Netsurit’s acquisition of iTeam is part of its strategy to expand its growth in the U.S. and extend its footprint to the West Coast, as iTeam is headquartered in Albuquerque, New Mexico. Netsurit is based in New York.

The State of M&A in the Channel

M&A activity in the MSP channel will grow 50% in 2024, returning to 60% of 2021 levels, wrote Jay McBain, chief analyst of channels, partnerships and ecosystems at Canalys, in a LinkedIn post. At least three RMM and PSA vendors will be acquired by 2025, McBain predicted.

In 2023, the global MSP market size was an estimated $299 billion and is projected to grow at a CAGR (compound annual growth rate) of 13.6% globally and 12.8% in the U.S. through 2030, according to Grand View Research

Several aspects of the MSP business model make it an attractive investment, not just for larger IT service providers, but also for financial investors, according to a report on MSP demand in 2024 by Greenwich Capital Group.

Related:Latest Big Channel M&A: Cohesity-Veritas, Broadcom-VMware EUC

“MSPs have the unique ability to produce predictable revenue streams, foster strategic relationships with customers, scale their services to meet demand, and deliver proprietary knowledge about niche industries,’’ the report says. “These characteristics combined create a wide, competitive moat.”

The MSP industry “is in a rapid state of consolidation,” with more than 60 listed MSP transactions in the U.S. alone since January 2024, according to Jeff Goodman, managing director of Greenwich Capital Group.

What MSPs Want from Other MSPs

The most in-demand MSPs are generally those with the healthiest business models, as well as those that focus on cybersecurity, says Robin Ody, principal analyst of MSP Analysis, Canalys.

Canalys' Robin Ody

“But it is the underlying health of the business and the reach of the partner,’’ meaning the number of customers and vertical penetration, which tend to be the defining factors, he said.

While acquiring firms look at many metrics before buying an MSP, the most obvious, according to Ody, are:

  • Revenue

  • Growth

  • Gross margin on services

  • MRR ratio

  • Customer and employee churn

  • Certifications i.e., technology specialization and level of capability

  • Vertical specialization

  • Market share

  • Length of customer contracts

  • Cyber insurance status of the MSP

  • Compliance resiliency of the MSP

  • Ticket clearance rates and customer satisfaction scores

“Some of the most active acquirers [of MSPs] are private-equity backed groups looking to add human capital, new product offerings and/or industry specialization,’’ said Goodman. Demand for MSSPs is at its peak right now “given the massive increase in ransomware activity, intrusion attempts and continued deployment of IoT,’’ he said, adding that the firm also is seeing increasing demand for MSPs with AI expertise. 

Considerations When Merging MSPs

A lot of MSPs don’t know when the time is right to buy or sell a company, but the most important part of the process is the impact a merger will have on your customers, said Carolyn April, vice president of industry research at CompTIA.

Financial metrics aside, “The No. 1 thing you want to make sure you don’t mess up in a merger is your customers,’’ she said. “Often, there’s one alpha involved in a merger — a bigger company buying a smaller one,” so it’s incumbent upon that smaller MSP to make sure their customers aren’t shortchanged.

They must also consider whether the culture of the larger company will subsume the smaller company, so it’s important for both sides to be on the same page and communicate about what things will look like after the merger, April added.

“We see what looks on paper to be incredible mergers, and they turn out to be terrible. One reason is the cultures are a bad fit and they did a bad job communicating how to sort that out,’’ said April.

Often, issues such as what to do about redundant services can be solved, but if the customer experience varies widely, that can spell disaster for a merger, April said.

Ody agreed, saying cultural fit is one of the main things MSPs need to consider, but that isn’t always easy to glean beforehand.

“Trying to merge two firms that don't fit will always be hard, and it is rarely something that can be truly determined until after the acquisition,’’ said Ody.

Some of the issues that can be hard to gauge are the merging of technology stacks, billing platforms, sourcing/distribution, and payroll and compensation methods, Ody said.

Goodman also said that cultural fit is “always a determining factor in success,” which applies to any industry, although it “becomes slightly more important in a hot merger market, like we are in now.”

He cautions that “the sellers are frequently driven to maximize transaction value over cultural fit,” while buyers are often motivated by client lists, cross-selling opportunities, “and other factors that look really good on paper.”

Despite the challenges, expect MSP M&A activity to remain healthy in the coming years. Key trends including the surge in cloud migrations, outsourced IT departments, and the increasing complexity of cybersecurity are fueling the desire among “financial and strategic investors to acquire managed services providers,’’ the GCG report states. The firm expects to see “M&A activities … flourish in the coming years, and companies must be agile to navigate these changes.”

About the Author(s)

Esther Shein

Contributing Editor

Esther Shein is a longtime freelance journalist who specializes in writing about tech and business. Her work has appeared in several online and print publications. She was previously the editor-in-chief of Datamation and a senior writer at eWeek (formerly PC Week).

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