Picture this: You compete in an emerging, fast-growth software market. The highly fragmented industry is filled with multiple, successful software companies. Most of the companies are relatively small and privately held. Suddenly, industry growth rates slow a bit amid the recession. So, what happens next? Mergers and acquisitions. That’s the scenario facing the managed services software market. Here’s where I think we’re heading next.
First, some background.
- I have no first-hand knowledge of any pending M&A activity in the MSP software industry.
- I believe we’re going to see some deals later this year, based on my conversations with dozens of MSP industry leaders, and MSPmentor’s ongoing coverage of this industry.
Why Now?
Nimsoft CEO Gary Read inspired me to write this blog post. During a recent phone call and in a recent blog post, Read conceded that Nimsoft has been the subject of takeover speculation by the media — though he downplays the rumors. Read also told me he hears from at least one company daily seeking to be acquired.
Level Platforms CEO Peter Sandiford insists his company has seen no sign of slowing MSP industry growth. I respect Sandiford, but I think his outlook is a bit too optimistic. Just about everyone else I’ve heard from — Autotask CEO Bob Godgart, ConnectWise CEO Arnie Bellini, N-able CEO Gavin Garbutt, Nimsoft’s Read, and so on — says industry growth rates are either slowing or becoming far more challenging. I think that market reality will drive M&A activity.
To be clear:
- The MSP industry is still growing, which is rather incredible news in this economy. I am not saying the industry is shrinking.
- Successful MSPs remain ideally positioned in the IT channel.
- But growth rates are most definitely slowing.
Money Matters
Now here’s where things get interesting. Some privately held MSP software companies have angel investors and venture capitalist funding. And at some point, those investors will want to cash out — either through an IPO or by selling the company.
On the flip side, big technology companies — Microsoft, Cisco Systems, etc. — are sitting on billions of dollars in cash and looking for growth-oriented acquisitions. The big questions… Will MSP software providers:
- Wait out the recession and keep their eye on the IPO target?
- Entertain offers and sell out to the highest bidder?
- Remain private and closely held forever?
Of course, scenarios vary from company to company. Some firms — such as ConnectWise and Kaseya — were funded by their founders. They answer only to themselves and don’t need to worry about outside investors seeking a return on investment.
Other firms that have venture funding tell me (A) they are well funded to ride out the recession and (B) they’re in no rush to sell out. In fact, many of those venture-funded firms are cash flow positive, meaning their balance sheets are getting stronger and stronger each quarter.
Lots of Wild Cards
Still, I think we’re going to see M&A activity based on two potential scenarios:
1. PSA (professional services automation) Meets Remote Monitoring: Yes, a growing number of MSPs use PSA software (Autotask, ConnectWise, TigerPaw, etc.) in combination with remote monitoring software (Kaseya, Level Platforms, N-able, Dell Silverback, etc.).
If one PSA company was to acquire one remote monitoring company (or vice versa), I believe it would set off a chain reaction/buying frenzy. Every CEO in the industry would instantly need to reconsider their competitive position, and competitive options.
Why haven’t we seen a PSA/Remote Monitoring merger in this area yet? Two reasons: Price and personality.
As my dad (a real estate pro) always said: Everything is for sale, it’s just about negotiating a price. Most MSP software providers haven’t sold out because their management teams genuinely enjoy building companies, and they see multi-billion-dollar opportunities ahead.
It’s like playing Deal or No Deal. Industry CEOs still see big money on the board, and they don’t want to sell out too early at too low a price. But the recession could impact that optimism a bit, and bring partners or rivals to the negotiating table.
In the MSP market, things get extra complicated when you throw in the personalities. Just about every MSP software provider has a strong-willed CEO who has shaped the company in his image. Can you image ConnectWise’s Bellini reporting to Kaseya CEO Gerald Blackie — or vice versa?
That’s like asking Richard Petty to take his hands off the wheel and sit in the back seat.
2. Microsoft or Cisco Come Calling
Now for the other M&A scenario. I could be wrong, but I’m still convinced Microsoft will enter the managed services software market at some point.
The company already has close working relationships with MSP software providers. And with Windows 7′s launch just around the corner, it would make perfect sense for Microsoft to get even more serious about a managed services move.
Back in the 1990s, Microsoft launched Systems Management Server (SMS) to help businesses deploy and manage Windows NT and Windows 95 systems.
Fast forward to the present, and Microsoft could repeat that strategy in the managed services market — either launching or acquiring a tool to help MSPs remotely deploy and troubleshoot Windows 7 systems.
I’ve been hearing rumors about Microsoft launching its own tool since October 2008. I’m convinved something is brewing in Microsoft R&D or Microsoft M&A…
Meanwhile, Cisco Systems continues to bolster its Cisco Powered Managed Services initiative. I don’t think Cisco is very interested in MSP management tools that serve small businesses. But I do think the IT giant is taking a close look at MSP tools that serve midsize and large companies.
Remember: Massive service providers like Verizon Business and AT&T are introducing managed unified communications, managed security and other services built around Avaya, Cisco, Juniper and Nortel technologies. To build more market share, Cisco may want to leverage new tools that help big service providers better manage those customer systems.
I firmly believe consolidation is coming this year. It’s just a matter of who fires the first shot. And when.
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Posted In: Acquisitions | MSP Mergers and Acquisitions | Professional Services Automation (PSA)
Tags: Autotask CEO Bob Godgart | ConnectWise CEO Arnie Bellini | Dell Silverback | Kaseya CEO Gerald Blackie | Level Platforms | Level Platforms CEO Peter Sandiford | N-able CEO Gavin Garbutt | Nimsoft CEO Gary Read
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I think we’ll see RMM tool vendors buy each other first to consolidate products and customer bases.
Firing First: Interesting speculation and definitely a possibility but I haven’t heard any rumors in that area. If that changes we’ll blog about it.
Very interesting article, Joe. I do wonder, however, about whether or not the whole RMM / PSA thing would be sensible.
At Virtual Administrator we work with many partners. While we currently use ConnectWise internally, our product(s) also work with Autotask. Both Connectwise and Autotask have made their APIs available to companies that provide billable services in order to facilitate choice for MSPs. As we bring on new partners, we work with them to make sure they can integrate with PSA platforms (haven’t really come across TigerPaw as much in our hosted MSP world).
I would think that if an RMM company bought one of the PSA companies (or vice versa), that the integration available for that combination would continue in development to further drive sales and the APIs would get weaker and more ignored for general integration. Flexibility and interoperability would fade in favor of “one app that does it all”, but that would limit MSPs to the tools their vendor chose, not ones that they chose themselves. One thing we’ve seen in the Virtual Administrator community is that there are many different ways that people choose to get done what they do. Some of our Hosted SonicWALL GMS customers use Zenith. Some of our Hosted Kaseya partners like FortiNet, etc., etc.
So my question for you is would that type of merger be a wise move? Do you think that the PSA/RMM vendors could really maintain openness and interporability with other products? I’m curious, drawing upon your experience with Ubuntu in WorksWithU, have any of these types of mergers happened there, and if so, how did that play out?
This is really a very interesting subject – I look forward to your response.
Rich: All of your logic makes sense. But consider this: We’ve already seen competition/cooperation (“coopetition”) mergers succeed in other industries.
For instance: Oracle was dominant in databases and acquired applications, yet the Oracle/SAP combo remains strong. I think the only way an RMM/PSA merger happens is if the RMM portion has major market share. Such a deal would not involve a niche RMM provider. And again, all of the info above is pure speculation on my part. I am not suggesting that such discussions are occurring…
-jp
Joe: You have correctly identified the importance of the connection between RMM and PSA systems, which I once referred to as the Yin and Yang of managed services. And essentially agreeing with Rick, believe that the reason mergers in this area are unlikely goes well beyond price and personality. In fact both the RMM and PSA providers would diminish their value by limiting their support to only one making a proposed combination difficult to justify.
Our response to this reality is to create comprehensive two-way integration with all of the leading providers including Autotask, Connectwise, TigerPaw, Microsoft CRM and others like Solutions 360 as well as enterprise products like Service Now, CA Service Desk and Remedy. The goal is to make the integration so complete that a user barely knows which application they are in and I believe we are well down this path.
Going one step further, we provide complete synchronization of these systems so that MSPs can collaborate with one another, opening and closing cases and sharing information with cooperating MSPs regardless of their preferred PSA or allowing virtually any NOC to provide services using their own help desk solution while integrating this with multiple PSA solutions preferred by their partners.
By cooperating, both PSA and CRM companies can bring differentiated value to a broader segment of the market as well as create new collaborative opportunities. We enjoy great relationships with all the PSA vendors as we all work together to broaden rather than limit the applicability of our products.
In fact we extend this “open” philosophy to everything we do supporting a dozen remote BDR solutions as well as all of the major antivirus and other security vendors. We think choice and flexibility are the key to market differentiation and ultimate success for anyone serving the MSP market and that integration with the full ecosystem is a better strategy than mergers and acquisitions or OEMing third party products that ultimately end up reducing rather than enhancing the ultimate value to the MSP we are all trying to serve.
Peter Sandiford
CEO
Level Platforms
psandiford@levelplatforms.com
Peter: The “open” philosophy is a great philosophy. But I do think all bets are off if/when an M&A occurs. For years, IBM said they would never get into the applications market. But as Oracle and SAP consolidated the market, IBM finally snapped up Cognos. Each time a software acquisition occurs, the entire playing field re-evaluates their partnerships, acquisition targets, etc.
Still, the open approach evangelized by Level Platforms and several other PSA/RMM companies is a win-win for software companies and their customers, no doubt.
Lots of interesting stuff and I think that you are right to speculate that M&A activity could happen in this space.
One of the effects of the market correction from last fall is that there is a difference in valuation between buyers and sellers. Private companies still believe that they are valued the same as they were prior to the correction, yet the buyers are looking to take advantage of the market conditions. Thus, sellers won’t sell in the short-term because “it’s 30% less than I could have got 6 months ago” and buyers won’t buy because “we’re not sure where the economy is going to be at in 6 months”.
That situation takes a while to work its way out. The sellers expectations get reset and the buyers get more confident that the economy is stabilizing so gradually both sides move back to the middle. My gut feel is that both of these pieces are starting to happen which will create an M&A environment.
I would not be surprised if M&A happens in this space before the end of the year, in fact I’d be surprised if it doesn’t.
The issue facing this market is the same as it is in any other rapidly growing market: many small companies competing in a highly fragmented space.
M&A activity is inevitable for two very simple reasons.
First, due to the increasingly competitive landscape, as is the case in any rapidly growing market, many of the small application providers will be forced to extend their value beyond their core offering to continue fueling growth. Some of these organizations will be forced to broaden the reach, capabilities, value, and customers that their applications serve, and that typically means extending into related and synergistic capabilities.
Second, as pricing pressures and increased competition assault your core offering, how do you continue to grow revenue and profits while winning new customers and retaining the ones you already have? Companies will be forced to find ways to continue to differentiate themselves and own/offer a larger spectrum of the total value demanded by the target market they serve. You cannot grow indefinitely with your core offering as competition increases and your particular piece of the solution is one of many parts of the overall value equation your users are required to deliver.
Acquisitions do not have to adversely impact the interoperability between platforms. It would be crazy for any company to buy another and force proprietary behavior on their clients. But expanding the value spectrum you can deliver via an acquisition brings in short and long-term revenues, further differentiates your product value, enriches your overall value to the market, and adds to your total target market opportunity…all of which fuel growth. Which is why such activity is inevitable in this market.
While I wouldn’t be surprised by M&A activity in our space, it might be for reasons you didn’t mention in your article. As the RMM and PSA markets reach saturation, the vendors are left with two alternatives: create new markets (e.g., move into the enterprise space), or expand existing marketshare. What better way to achieve the latter than to acquire a customer base through M&A.
Jim Lancaster
Sagiss, LLC
Hi all,
I agree with Peter – I’m not so sure such a merger would take place, and if it did, it might not actually be healthy for those that merge. As with Level Platforms (Peter – my developers really like your technical team!), we integrate with Kaseya, N-able, and very shortly Zenith. What we’ve found is that users want a choice, and not all applications are created equal. For example, PSA is one compenent of Tigerpaw (we are the only end-to-end solution with full CRM, marketing, quoting and proposal generation, purchasing, inventry control, serialized tracking, etc. etc.). We just got back from Robin Robin’s bootcamp where our CRM and marketing engine was a huge hit and we signed on dozens of new customers. What would have happened if we only worked with one RMM? How many of those new customers would have switched to us if that required that they replace with RMM with “ours”? Many switched from an existing PSA solution, so perhaps they would have been open to switching their RMM as well, but I’m not so sure. By being an open platform, it doesn’t matter what their RMM software of choice is, they can continue to enjoy it and leverage their investment in time and money yet now aso enjoy the benefits that Tigerpaw offers.
While I think the idea of a merger seems appealing on the surface, it doesn’t seem so appealing from where I sit. Then again, I don’t think I could work for someone else.
James Foxall
Senior Vice President
Tigerpaw Software
James: Always good to have your perspective. One thing I love about this industry is all the individual entrepreneurs who are determined to partner even as they strive to grow their own businesses.
I still believe that in business, everything is for sale at some price. It’s just a matter of working out the details: Money, who runs the merged business, and who heads to the beach with a short-term non-compete and a treasure chest.
hmmmmm, beach did you say???
James Foxall
Senior Vice President
Tigerpaw Software