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Expect another flurry of channel-relevant M&A deals in 2019.

January 4, 2019

6 Min Read
Mergers and acquisitions
“Doing your pre-merger due diligence is essential, but we have learned, at times the hard way, that this due diligence shouldn’t just be from a financial standpoint. Getting a full understanding of the way the incoming organization functions from a process, policies and a personal, human component (or ‘HR factor,’ as we’ve come to call it), is key. As the company doing the acquisition, you want to take your time in getting to know the organization you’ve acquired and fully understand the way that they were doing things, presumably successfully, before you came into the picture. Remember that if they were profitable before you merge, they should remain profitable afterward, so you do have some time on your side to cement the courtship before bringing things under one roof.  You need to take your time with that HR factor in an acquisition, but not from a branding perspective. We once learned in an early acquisition, and learned the hard way, that corporate communication, both internal and external, needs to have a set ‘go-live’ date and plan in place well before the transaction.  On that date, you need to have all your ducks in a row so that your two teams coming together as one know exactly what they need to about the company as a whole, its vision, and how the brand is going to go to market in the future. If you let both brands co-exist separately, it will only make ripping the Band-Aid off later more difficult, more time-consuming and more costly as the departing brand becomes more and more embedded.” —Aaron Bradley, VP of marketing, CareWorxShutterstock

By Kevin Casey

There were plenty of evident trends in the channel in 2018 — the rise of the MSSP, for example, or the growth of cloud-focused MSPs helping customers navigate their moves to AWS, Azure, and other platforms.

Follow the MoneyOne of the biggest ongoing stories last year in the channel—and one that’s poised to continue apace in 2019—can be summarized in a couple of letters: M and A.

As in: mergers and acquisitions, or M&A. There were scores of them last year, both among partners themselves and in the vendor and supplier world too. Some M&A activity is just about always par for the course in the business world, but 2018 was a banner year for deals: The Wall Street Journal recently reported that 2018 appears set to become the third-busiest year ever for M&A activity.

Both the channel and the tech sector at large were especially active on the deal-making front.

Forrester analyst Jay McBain, who extensively covers the channel, notes that M&A activity was strong in what he refers to as the channel software stack, with 14 percent of companies listed there acquired in the previous year.

There was also plenty of activity among partners themselves, with the MSP consolidation trend moving full-steam ahead. The reasons are plenty, but they boil down to a “simple” factor: money.

Margins are shrinking for many MSPs, and McBain notes that it’s challenging for the vast majority of MSPs to scale past the 10-employee mark without joining forces with other firms. Some of them also lack the sales and marketing chops necessary to go from a small shop to become a much larger concern. Meanwhile, private equity firms flush with cash are lasered in on the segment, as well as the broader channel and technology industries, as ripe for investments and M&A deals.

Welcome to “Follow the Money,” our new column that will keep tabs on M&A activity in the channel. Barring a total economic meltdown (in which case we’ll have a whole other set of stories to pursue), it’s almost certain to continue to be busy in 2019.

McBain says that while the economics of the channel may be shifting, there’s still plenty of opportunity. A key force behind the scenes: Private-equity and venture-capital firms are pumping considerable dollars into the industry, in part because of the widespread fever pitch around digital disruption and transformation.

M&A activity is up, private equity firms are throwing their weight around in the channel, and markets are on a roller-coaster ride. You need to Follow the Money. We’re here to help.

He points to ISVs as an example: There are approximately 100,000 of these software firms today, according to McBain; that’s a tenfold increase from the 10,000 or so that existed a decade ago. McBain predicts there will be …

… 1 million ISVs 10 years from now. He also notes that, of the 100,000 ISVs today, roughly 5,000 are getting private-equity or VC investments every year.

Forrester's Jay McBain

Forrester’s Jay McBain

“That’s a huge number,” McBain tells us. “These are millions and millions of dollars that are going into these companies that they’re investing into development, sales, marketing, and really trying to get in front of buyers and become a key part of the solution. That’s a big story on the M&A side [and] on the investment side. Wall Street has definitely woken up to the opportunity in tech and they’re playing a role.”

We’ll be keeping close watch in the year ahead, tracking the deals and rumors, what’s driving them, and what they mean – or might mean – for channel partners.

ICYMI: Roundup of Recent M&A Activity

Here’s a representative recap of recent deals (or potential deals) that happened in the final weeks of 2018 and on into our new year. Each speaks to some of the macro trends we’ll be covering in the weeks ahead.

  • ConvergeOne acquires Venture Technologies: MSP ConvergeOne announced in December that it would acquire Mississippi-based Venture Technologies in a deal valued at $92 million by M&A advisory firm martinwolf. The deal is a good example of one driver of the broader MSP consolidation trend: growth by M&A. In fact, the company noted its “growth through acquisition” strategy in a release. It’s also an example of where much of the money fueling these deals is coming from: ConvergeOne was acquired in November by private equity firm CVC for $1.8 billion in an all-cash deal.

  • Intel and TPG in talks to sell McAfee to Thoma Bravo: Speaking of private-equity firms flush with cash: CNBC reported in mid-December that Thoma Bravo was in early discussions about a possible acquisition of security firm McAfee from Intel and TPG, apparently for a considerable markup from the $4.2 billion TPG paid for the company in 2017. Thoma Bravo has been plenty active in the tech space, both as a buyer and investor, and especially in the security realm: The firm announced in October a deal to buy Imperva, and Reuters reported in November that Thoma Bravo had approached Symantec about a possible deal. Thoma Bravo also announced in November a deal to buy Veracode, and it completed an acquisition of Barracuda Networks in February 2018. Expect the security space to be buzzing with M&A activity for the foreseeable future, both among vendors and in terms of consolidation (often backed by private equity money) among MSSPs and other partners.

  • Windstream sells EarthLink consumer internet business: Windstream announced that it is selling the EarthLink consumer internet business to private equity firm Trive Capital for $330 million in order to focus on its core business units. Here’s a deal that should ultimately become good news for partners, because Windstream is effectively shedding a legacy consumer unit that’s outside of its core focus. Curt Allen, Windstream Enterprise’s senior vice president of channel, told Channel Partners’ Edward Gately: “We will continue to support the channel and extend even more resources to help our partners migrate their customers to next-generation solutions in 2019.”

  • C3 Gains Colocation with EtherneXt Acquisition: Cloud Computing Concepts (C3), a B2B technology and communications services provider, just announced that it has closed its deal to buy EthernetXt, to both extend its market reach and its colocation services portfolio while beefing up its revenue base. “The EtherneXt acquisition is significant in that it touches on each of these areas, thus further positioning C3 as a single-source partner of choice for the channel,” Rick Mancinelli, C3’s founder and CEO, told Gately.

Expect to hear phrases like “growth through acquisition” and “single-source partner” plenty more in 2019.

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