What Does the ConnectWise Buyout Say About the MSP Market?

… you’re in the right sector, which is super freaking cool.”

A Bumpy Road for ConnectWise?

When ConnectWise announced the buyout, it admitted to an immediate round of layoffs in the same breath. Bellini called it an overdue realignment. Such collateral damage is expected in the wake of an acquisition like this, and the industry knows from recent experience that it likely won’t be the last shake-up. Last year, Datto’s longtime CEO Austin McChord abruptly left the company’s C-suite almost one year to the day after the Vista buyout, joining a slew of other executive departures in the wake of the company’s merger with Autotask. And Kaseya’s Voccola still cringes when he looks back on the restructuring chaos following the company’s acquisition by Insight.

Kaseya’s Fred Voccola

“It was a painful 2013, ’14 and ’15 for Kaseya,” he recalls. “It takes a year to 18 months to get the right mix. And when you have those reductions, it hinders the company’s ability to operation. Everything changes. There’s nothing unique about what ConnectWise is about to experience.”

At the end of the day, Thoma Bravo’s investment in ConnectWise will lead to a stronger, better-positioned company. As it moves from that growth stage into maturity, operations will be streamlined and scaled, investments into product developments will be optimized and the caliber of both the tech and executive staffs should rise. The long-term outlook for ConnectWise is promising, but those who have watched its competitors go through this cringeworthy adjustment stage are bracing for some bumps. And while the cash infusion should someday pay off in terms of products, services and support, there’s potential for stagnation in the short term.

“Here’s how these deals work,” explains Voccola. “[Thoma Bravo] paid [$1.5 billion] for it. Probably put $500 million of debt into a billion of equity. They’ve got to service that debt, probably at around 7-9 percent …That’s $35-50 million dollars a year to service your debt.”

If that’s how it plays out, the initial round of layoffs might just be the beginning. Investors call it “expense management” or “realignment,” but often that means cutting costs, and where those cuts come is unique to each business’s ledger sheet. Common victims are support, back-office administration, executive salaries and R&D.

On the other hand, you don’t grow a company in the long term by slashing expenses. Thoma Bravo bought ConnectWise because it believes it’s a sound investment, and when you’re talking that much money in an industry that’s maturing as fast as this one is, investments into those same areas may come surprisingly quickly. As Continuum’s George puts it, by their very nature, investment firms don’t “save their way to success.”

“You don’t keep cutting into a company to derive success,” says George. “That might have happened at the onset, and that may happen again. I can’t speak for what their plans are in that regard. But I can tell you that the general investment thesis of a company like Thoma Bravo is to find ways to invest in companies, not to keep cutting costs out of them.”

Thoma Bravo’s Growing Family

There’s been speculation that Thoma Bravo may bring some of its managed-services family together. That’s what happened when Venture bought Datto and merged it with Autotask, and last year, Kaseya brought fellow Insight-owned provider Unitrends into its fold. While Thoma retains a controlling share of SolarWinds – together with Silver Lake Partners, they own approximately 88 percent of the company’s shares – it no longer owns the company, but it still has …