The managed services provider (MSP) market is starting 2012 much in the way it started 2011: With plenty of MSP merger and acquisition activity. We’re tracking all of the M&A deals on MSPmentor’s MSP Merger and Acquisition page. As of this writing, four M&A deals involving MSPs have either been announced or completed since the New Year. What’s driving the M&A activity?
Here are five educated guesses:
1. True Synergies: In the case of Network Depot buying Evolve Technologies, both companies service SMBs in the Washington, D.C., metropolitan area. Plus, executive from both companies have longstanding relationships. Over the long haul, I suspect Evolve CEO Dave Sobel will focus more of his time on being a market educator and evangelist — though it sounds like the proper financial motivators are in place to keep him focused on successfully integrating Evolve with Network Depot.
2. Regional Focus: The Canfield-Steel Valley deal essentially doubles down on the Ohio region. This is a very small regional deal, likely involving fewer than 10 employees overall (my educated guess). But it’s symbolic of the larger IT channel, where small VARs and small MSPs are looking to partner up for local scale.
3. Deep Pockets: In the case of mindSHIFT, I believe the company wanted a deep pocketed parent to help scale the company’s cloud and managed services. Plus, early mindSHIFT investors may have wanted an exit. Best Buy answered the call for help.
4. Entrepreneurial Fatigue: Let’s face it — many entrepreneurs have been building their managed services businesses for five or more year. Some of those executives expected rapid returns on those investments, only to discover the managed services market is a lot more difficult than it looks. Hench, some MSP leaders are opting for an exit if it includes a reasonable payout and/or earnout opportunity.
5. Competitive Pressures: In the case of Birch Communications buying AstroTel’s “assets,” I suspect AstroTel was facing intense competition from telecom giants and needed to partner up.
MSPmentor is aware of at least one more major MSP deal that is expected to be announced within the next two to three weeks. We’ll continue our daily analysis as more deals emerge.
And one final note: MSPmentor is not suggesting that entrepreneurs are getting rich from the M&A deals. In many cases, MSPmentor suspects, the deals are more about business synergies and long-term target earnouts rather than high valuations and instant cash for sellers.
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Posted In: Acquisitions | Mergers & Acquisions | North America
Tags: AstroTel | Best Buy | Birch Communications | Canfield Computers | evolve technologies | managed services acquisitions | Managed Services Mergers | mindSHIFT | MSP acquisitions | MSP Mergers | Network Depot | Steel Valley
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I think in each of these deals, it is important to look at who stays and who goes from a personnel perspective. I think the most interesting deals envision a new, combined management team. In those cases, the acquired management sees a 1+1=3 type opportunity and is focused on staying put and growing the business together.
If they are exiting either voluntarily or at the behest of the new owner, I suspect the synergy opportunities will be low. Talent, not the installed client base, is the key asset in any business with $25 mil in revenue and below. If the top talent leaves, buyer beware.
Ted Hulsy
eFolder, VP of Marketing
@tedsefolder
ehulsy at efolder dot net
Ted,
You just struck a nerve with me. SMBs are hosed without talent retention — regardless of ownership status. Right on.
But I also think there are responsible ways to manage a long-term transition — wherein an executive may ultimately exit. Example: Evolve Tech CEO Dave Sobel has made it clear that the Network Depot-Evolve Tech deal has certain built-in requirements that will keep him motivated and focused on the deal’s execution. The right talent also requires the right motivators…
-jp