Mergers and acquisitions, while an ever-present reality in telecom, seemed to flourish in 2011, as the cloud, economic pressures and the need for greater scale pushed dozens of communications companies toward consolidation. Within the niche channel partner sector, such transformational activity appears likely to continue, albeit on a smaller scale, in 2012.

In an October 2011 Channel Partners reader survey, 45 percent of respondents said they will be eyeing M&A. Of course, that leaves another 55 percent saying they will not. Concerns include the absence of reliable valuation, lack of capital, challenges with vendor agreement transferability, owner ego and integration of management, employees, culture, and back-office and operating systems.

Still, despite those challenges, three quarters of respondents predict more agents, VARs and dealers will join forces in 2012. Those matchups, they said will be fueled by five overarching trends:

Cloud Services. Earlier this year, Forrester Research predicted the global cloud computing market will hit $241 billion in 2020, up from $40.7 billion in 2011. Survey respondents argued that cloud services will spur M&A in the coming year. Thats because cloud will force more VARs to develop a recurring revenue model and, to achieve that, many will merge with or acquire synergistic rivals that have recurring revenue. Similarly, agents need to keep adding mobility, network optimization and hardware to their portfolios to avoid becoming commodity partners, and there likely will be more partnerships among agents and VARs as a result.

The solution sale must incorporate the user equipment, transport and cloud apps,” said one respondent. You cannot ignore one area any more.” Another agreed: If done right, the customer benefits by having a unified vendor that provides the hardware and carrier services.” Several respondents said such capabilities will come about as a result of M&A.

Recurring Revenue. Declining margins makes up one of the biggest problems facing telecom VARs and dealers. As a rule, these channel partners relied on hardware sales, with one-time, upfront compensation. But hosted and cloud services have eaten away at that model because they move equipment that once resided on the customer premises into data centers. Now, organizations buy or lease IP phones, not servers and other gear that historically has comprised a VAR’s or dealers paycheck. The shift is pushing those partners to add managed services such as network monitoring to their portfolios. This results in ongoing billing to the customer, and, as a result, recurring revenue. But that doesnt mean VARs and dealers have embraced the new approach, and M&A may be their best option for growth.

The VARs/dealers focus on the month-in-month-out large equipment sales,” one respondent said. Carrier services is a smaller and slower revenue-recognition model. From what I see today, many VARs still consider carrier revenue/carrier services as a small piece of the pie.” Another anonymous respondent said VARs and MSPs are up against a size problem. There are still a lot of small VARs/MSPs who know how to do great technical work, but cant get beyond three to seven people. I think they are excellent candidates for acquisition.”

The Economy. Channel Partners readers predict more M&A among VARs, dealers and agents in 2012, and 17 percent cite the unceasing weak economy as the key reason. Indeed, on the macro scale, major European countries are slashing their economic forecasts for 2012 while Greece continues to battle default with austerity measures. Meanwhile, the United States still is grappling with near-double-digit unemployment as job growth remains feeble. On a micro level, for channel partners, these global influences have created a dual effect. More end-users are pressed to do more with less, meaning they must expand operations while constraining costs. They have less money to spend on capital outlays such as infrastructure but they can afford monthly payments for software licenses, for example, from their operating expenses budgets. This change tends to hit VARs and dealers in the gut, given their emphasis on hardware and infrastructure, while agents have a more solid grasp on the recurring revenue model. Thus, survey respondents said, the most successful companies will keep buying the smaller ones that will benefit from more stable, well-financed parents.

Other Trends. There are two other main reasons why Channel Partners readers see more M&A in store for the sector. First, many agents and interconnects/dealers are growing older and want to retire. If you think about it, a number of them have been in the industry since the 1980s and are in their 60s and 70s. A merger or acquisition would give them a way to cash out of their lifes work.

Finally, several respondents said M&A will become more prominent in 2012 as agencies band together to have more clout with carriers. This view comes as several service providers have changed agents terms and conditions and, as in the case of Internap, even canceled agents altogether with little regard for the impact on partners. One respondent said agents merging could result in larger commissions and less contract volatility, while another noted that carriers simply want to work with larger partners anyway.