Mergers and acquisitions have been part of the fabric of the managed services profession since the mid-1990s when MSPs first appeared. They play a vital role in the growth of MSPs as well as the disposal of underperforming companies. The COVID-19 pandemic, however, is creating what could be an unusual and bumpy ride for MSP M&As.
Here's what the MSP M&A landscape may look like over the next 12 to 24 months. MSPs need to keep these key points in mind as they plot a strategic business course during and after the pandemic.
Investors move to the sidelines
The proclamation of a global pandemic caused most countries around the world to halt or severely curtail their industries. This artificial slowdown forced many investors to put their plans on pause, and that includes acquisitions for MSPs.
Most MSPs are not capable of funding their own M&A deals and rely on external funding sources such as banks, private equity firms, friends and family. A lack of funding for MSP acquisitions and mergers will necessarily have an impact on the number of M&A deals until economies reopen.
MSPs still in demand
The pandemic has done little to slow the demand for outsourcing IT management to MSPs. This resiliency in demand for managed services is consistent with previous periods of economic downturns such as post 9/11 and the 2008-2009 mortgage crisis.
So long as this demand remains robust, the potential for financially stable MSPs to sell decreases. Aside from the usual pressures like retirement, health and other personal issues that can trigger M&A deals, the business environment remains mostly positive for MSPs, with plenty of organic growth potential ahead.
'Reactive' IT providers are more vulnerable
One segment of the IT management profession that could be unusually susceptible to M&As is the break/fix, or reactive IT provider, community. These IT providers are more likely to be harmed by the pandemic economic shutdown compared to MSPs that rely on more stable recurring revenue relationships. As a result, break/fix IT firms could soon be pressured into seeking M&A deals, presumably with MSPs, to stabilize their businesses, protect clients and retain their employees.
MSP M&As will continue
Ultimately, life and businesses will return to normal. But until then, M&A deals will be hindered not only by obvious obstacles such as travel restrictions and social distancing guidelines, but also by the desire to reduce risk during periods of unusual turbulence and uncertainty.
Post-pandemic life will lead to an increased focus on the MSP marketplace by investors, bankers and financiers to capitalize on the renewed growth, specifically in the managed services profession and generally in overall global IT spending.
Key takeaways for MSPs
- Realize that now is the not the time for M&As. MSPs hoping to see M&A activity in 2020 may need to put those plans on the back burner. Keep an eye the market, but instead of focusing on M&As, concentrate on creative planning to meet customer demands and maintain your revenue streams and reputation.
- Prepare to scale services should demand remain strong. Don’t underestimate the high demand for managed services. Be sure supply lines and staffing are prepared to ramp up and meet the increased demand. Make alternative arrangements with secondary providers if necessary.
- Understand that there may be instability for some IT providers. Since certain reactive IT providers may be more vulnerable to M&As, don’t be too quick to make short-term changes that could affect your business in the long run. Keep your main business goals in mind and evaluate any changes extensively before implementation.
- Focus on organic growth. Before they risk capital, investors will look for MSPs capable of achieving organic growth. Proven MSPs will likely continue to see more attention from private equity firms and investors.
About the author
Charles Weaver is the CEO and co-founder of the International Association of Managed Service Providers (MSPAlliance). Since its inception in 2000, the organization has grown to more than 30,000 members worldwide. Under Weaver's management, MSPAlliance has expanded its reach and influence to include education, standards of conduct and certifications for managed services professionals and companies. Author of the book The Art of Managed Services, Weaver writes and speaks extensively about the managed services industry.