Will merger and acquisition activity in the channel be based on expansion or survival?
The IT channel has long been a hive of activity for mergers and acquisitions (M&A). But as restrictions start to lift, it is worth considering how the post-pandemic M&A landscape will look.
Understandably, we’ve seen cash conservatism during COVID-19, as businesses have retrenched and protected their assets. However, economists and analysts expect the aftermath of the pandemic to result in a surge of M&A. They see deal premiums being reduced and previously unavailable assets coming up for sale as businesses look for external financing.
“After a period of quiet, enforced by widespread economic disruption and uncertainty, the M&A market appears to be on the rise,” said Boomi principal technologist Mike Kiersey.
Kiersey believes that since many MSPs are struggling with digital and shifting business patterns, M&A offers a chance of expansion and, for some, survival.
“Many solution providers will be turning to private equity to keep their business afloat, whilst others will be buying to complement and expand their tech stack. Especially with the continued rise of cloud-based solutions needed for the new normal,” he said. “For some, disruption will be an opportunity to tap into the market in a way they have been previously incapable.”
Survival or Seizing Opportunity?
Acquisition has played a major part in the growth of pan-European distributor Exclusive Networks. The strategy has helped the firm expand into new geographies, including North America with the acquisition of VAD Fine Tec. It has also used M&A to increase market share in existing territories and accelerate growth into new markets.
Andy Travers, EVP, worldwide sales and marketing, Exclusive Networks, said COVID-19 hasn’t affected the firm’s M&A strategy.
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“For sure there will be some casualties in the coming months, as more and more companies look for investment to survive. In fact, we’re already seeing an uptick in frequency of acquisition opportunities. But we also see the strong getting stronger, which is why we will continue to take a more long-term strategic view of M&A as opposed to a short-term opportunistic one.”
Jim Lippie, SVP partner development, Kaseya, believes M&A going forward won’t be about survival; rather, it’s about seizing opportunity. He said that private equity firms now see an opportunity to make money after seeing how dependent on technology businesses have been during the pandemic.
“MSPs became the economy’s ‘first responder’ at the outset of COVID-19,” he said. “They clearly demonstrated their value to business customers who never truly appreciated them in the past. With greater industry appreciation comes more growth for the MSPs in a position to capitalize.”
Lippie said private equity firms also understand market consolidation.
“We will see consolidation in the MSP space, which will lead to a more mature industry with larger and more sophisticated MSPs. In the end, investors and strong MSP operators will benefit from all the buying and selling over the next several years on our way to consolidation.”
The exec said the only MSPs currently in survival mode are the ones who serve vertical markets hit hard by COVID-19 — or those that didn’t have a high enough ratio of recurring revenue in their portfolio to sustain their operations.
“Those are the MSPs who will see lower valuations as they look to be acquired now (4-6x EBITDA). But the larger ‘platform MSPs’ that are already at scale will trade at premium valuations for the foreseeable future (10-14x EBITDA).”
So, what hurdles do MSPs face when it comes to buy or selling a business? And does the unprecedented environment present …