IT services M&A, spinoffs feature Trace3, IBM

Transactions continue to abound heading into the fourth quarter of 2021, as private equity investors and strategic buyers scour the market for deals; other IT channel news.

Transactions continued to alter the IT services market this week with systems integrator Trace3 poised for new ownership and IBM moving closer to spinning off its managed services business.

American Securities, a private equity firm based in New York, agreed to acquire Trace3 from H.I.G. Capital, which has owned the integrator since 2017. During that time, Trace3 tripled its revenue to $1.4 billion, according to H.I.G. Capital, a Miami investment firm that provides debt and equity capital to small and midsize businesses. The pending deal continues the trend of IT services M&A, which have been booming in 2021 with MSPs and cloud consultancies much in demand.

American Securities has some track record in IT services, having invested in Presidio, an MSP, in 2011. Marty Wolf, president of MartinWolf, a merger and acquisition advisory firm based in Scottsdale, Ariz., noted the similarity of the investment targets. Trace3, however, is in a better position today than Presidio was a decade ago, providing a clearer "pathway to success," he noted.

While Presidio had concentrated on Cisco technology at the time of the American Securities investment, Trace3 offers a healthier mix of vendors and a more balanced portfolio of services, Wolf added.

IBM moves toward divestiture

IBM, meanwhile, moved a step closer to spinning off its managed infrastructure services business, as Kyndryl filed its registration statement with the Securities and Exchange Commission (SEC). IBM said it expects to execute the spinoff, which will make Kyndryl an independent public company, by the end of 2021. The divestiture, plans for which IBM disclosed in Oct. 2020, aims to reverse years of declining revenue and improve each company's business focus.

The Sept. 28 registration statement shows that the managed services unit's revenue declined from $21.8 billion in 2018 to $20.28 billion in 2019 and to $19.4 billion in 2020. The filing attributed the 4.6% year-over-year drop in 2020 to a "reduction in client volumes within industries heavily impacted by the global pandemic."

Parent company IBM's top line also declined over the 2018-to-2020 period.

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Looking ahead, Kyndryl's statement pointed to digital transformation and cloud migrations as forces for market growth. In addition, the SEC filing said Kyndryl will tap "a broad ecosystem of strategic partnerships" to develop services and access new customers and markets. The document cited IBM, VMware, ServiceNow and Microsoft as ecosystem partners.

J2 Global to split

In a spinoff with an acquisition angle, J2 Global, a cloud services and digital media company, said it expects to complete its separation into two publicly traded companies on Oct. 7. J2 Global, based in Los Angeles, will rebrand as Ziff Davis after the split, while the other independent entity will do business as Consensus Cloud Services.

With the spinoff still pending, the private equity owners of Jungle Disk, a cybersecurity suite, have acquired J2 Global's KeepItSafe, LiveVault and OffsiteDataSync cloud backup assets. Jungle Disk will add the three offerings to its software portfolio.

In early 2020, J2 Global entered the IT services M&A market as a potential buyer. The company planned to purchase Veeam service providers around the world.

It was very costly to provide IT services to a broad, geographically dispersed customer base.
Rick MurphyCEO and managing partner, Cogent Growth Partners

Accounting firm HBK buys MSP

HBK CPAs and Consultants has acquired Vertical Solutions, a Pittsburgh-based MSP that will join the professional services company's $10 million technology division. Cogent Growth Partners served as the acquisition's intermediary, assisting with due diligence and deal negotiation.

Vertical Solutions, rebranded as Vertilocity, will operate out of offices in Clark, N.J., Pittsburgh and Denver. Bruce Nelson, who founded the acquired company, is president of Vertilocity.

Rick Murphy, CEO and managing partner at Cogent Growth Partners, said HBK plans to grow its IT services business organically and through strategic acquisitions. The goal is to create a deeper and broader service suite, add specialized talent and enter new geographies, he noted.

The deal tracks with an emerging national trend in which traditional professional services providers, such as CPA firms, invest in IT services, Murphy noted. That pattern resembles the "Big Eight" accounting firms' 1980s strategy of expanding their IT consulting and systems integration practices. But in past years, IT was HR-intensive and either geographically specific or requiring extensive travel, Murphy said.

"It was very costly to provide IT services to a broad, geographically dispersed customer base," he noted. The difference today is the modern paradigm of remotely provided managed services, which makes the business much more cost-effective, he added.

Other news

  • MSP Corp Investments, a platform for MSP operators based in Ontario, closed on a $35 million round of growth capital, which the company said will accelerate its acquisitions and partnerships across Canada. BDC Capital, the investment arm of the Business Development Bank of Canada, led the transaction with the participation of the Canadian Imperial Bank of Commerce. An MSP Corp spokesperson said the company is open to purchasing MSPs with a variety of technical specializations but is particularly interested in Microsoft Azure/365 shops.
  • Upstack, a web platform that sells cloud services through sales agents, acquired two consultancies. Legacy Solutions, based in Chicago, specializes in forensic telecommunications expense audits and vendor management. Open Communications LLC, based in Utah, focuses on contact center as a service and unified communications as a service.
  • Technology managers see the value in DevOps and containers, but few heavily use those methods. Aptum Technologies, an MSP based in Toronto, polled 400 senior IT decision-makers and found 20% of respondents use DevOps across all applications and 17% said they use container services to develop and deploy all their apps. Expectations for future use are high: Seventy-seven percent of respondents expected to increase operational efficiency from expanded adoption of DevOps and containers. Fifty-nine percent of respondents cited improved customer experience, while 58% pointed to improved customer experience as anticipated benefits. Those results come from the fourth and final part of Aptum's "Cloud Impact Study."
  • HYCU, a multi-cloud data backup software company, added two partners to its Cloud Services Provider Program: Teraflow, which specializes in cloud migration and machine learning, and Extreme Solution, a Google Cloud partner that focuses on digital transformation projects.
  • Overwatch Managed Security, a business unit of High Wire Networks, launched a ransomware protection offering for MSPs. Overwatch Ransomware Kill Switch uses Airgap Networks' technology, which Airgap said limits the scope of a ransomware attack.
  • Brighter Futures Housing Association has selected Central Networks and Technologies, an IT solutions provider based in Greater Manchester, U.K., as its technology partner under a three-year deal. Central will provide endpoint and patch management, as well as capacity and availability monitoring.

Market Share is a news roundup published every Friday.

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