Technology M&A Landscape: Cloud is accelerating pace of MSP buyouts
It may not be a land rush but larger profitable and growing MSPs are fodder for acquisition in today's IT market as cloud computing becomes more integral to the way companies think about IT and the solution providers they do business with.
Evidence of this can be found at both All Covered, an IT services company and division of Konica Minolta Solutions US Inc., with more than two dozen locations nationwide, and the AJP Group LLC, a venture capital firm in Raleigh, N.C. In fact, All Covered has 30 acquisitions under its belt over just the last five years.
That's the motivation behind three high-profile technology M&A announcements made in June. IBM, for example, made public its definitive agreement to acquire SoftLayer Technologies Inc., a cloud computing infrastructure provider, as a path to accelerate the build-out of its public cloud infrastructure and its SmartCloud portfolio. IBM also announced a new cloud services division."Acquisition allows us to accelerate our growth, to bring in technology capabilities we didn't have prior to the acquisition as well as vertical industry expertise," said Bruce Teichman, director of corporate development at All Covered. To attain a similar level of growth organically would take 20 years, he added. "Buy it and it's immediate."
NTT Corp., the world's largest global IT and telecommunications company, and Solutionary Inc., a pure-play MSP based in Omaha, Neb., entered into a definitive agreement for NTT to acquire Solutionary. And on the same day, Earthlink, an IT services and communications provider based in Atlanta, announced an agreement to acquire Sunnyvale, Calif.- based MSP CenterBeam Inc.
Technology M&As aren't new in the IT channel. However, strategic deals and deals of opportunity are gaining visibility.
Charles Weaver, managing director at Weaver & Associates, an MSP M&A advisory firm, and CEO at MSP Alliance, reports healthy activity around the acquisition of mature MSPs.
"If a channel company doesn't have MSP expertise in house, then acquisition is the way to go," he said.
Weaver points to a global trend among office equipment VARs, the printer and copier type of companies, attempting to buy their way into the MSP market with a fury. Other similarly situated VARs that over the past decade didn't feel the economic downturn and were slow to evolve their businesses are feeling it now.
"These VARs didn't build out their business in time and have no alternative but to buy their way in, because what they have is a dying business model," he said.
Experienced investors like Teichman and Tony Pompliano, managing partner at the AJP Group, report that the number of potential MSP targets for acquisition are plentiful. This target-rich environment represents more opportunities than they can reach out to.
That doesn't mean this plethora of MSP candidates, in the thousands, meet the criteria of these buyers. Neither is it a fast and easy process.
The AJP Group, for example, has spent the past six months putting together resources to acquire and consolidate MSPs, cloud services companies and hosting companies. The small equity firm expects to close out 2013 with five acquisitions.
"That's part of our overall plan to assemble $100 million in revenue over the next 30 months -- or what remains of a 36-month plan," said Pompliano, adding that the firm is well on its way.
Anexio Inc. is an MSP in Sarasota, Fla., and the first acquisition by the AJP Group. An additional four companies will be folded under Anexio, all closing by the fall. AJP is also purchasing an additional three companies not related to the Anexio project.
Pompliano calls his technology M&A approach opportunistic -- in other words, as the situation arises and where it makes sense. He has very specific criteria for the companies he pursues: They have an ecosystem of IT services and 50% or more of recurring services revenue; a mature delivery and business model; annual revenue between $2 million and $10 million; a certain geographic coverage; and domain or technical expertise that's transferrable.
"They also have to have reasonable sellers," he said.
All Covered has similar criteria when shopping for MSPs. "Attractive companies have predictable business, a certain revenue growth rate, [good] customer retention [and] a consistent employee base," said Teichman.
For MSPs that meet investor criteria, it's a sellers' market. But most companies aren't out waving the flag that they're looking for a buyer, according to the industry experts.
In fact, the companies most vocal about selling tend to have a pressing financial need. "Often they're not profitable, have declining revenue and are looking for an exit strategy," said Weaver.
Gartner's Tiffani Bova, vice president and distinguished analyst, said that the majority of traditional VARs and systems integrators look to acquisition to provide them greater reach, technical capabilities and clients rather than companies that can give them an entirely new market or capability. In other words, they're looking at companies more like themselves than different.
"However, those who are willing to invest in their business and look towards future value scenarios can use acquisitions to speed up the return on those types of investments," she said.
Keep an open mind
Teichman wasn't in the market to sell his company when approached by All Covered in 2000. But he explored the proposal. "I was about to make another wave of investment in people and tools. So the idea of joining a larger company with more resources, employees and financials was appealing," he said.
Today, All Covered has 800 employees in 28 locations nationwide.
Teichman offers MSPs some advice that he said should apply whether or not they're looking to be acquired: Run your business as if you're going to sell it. "The things you do today -- all the things that foster a strong and healthy business -- will only serve to help your business tomorrow," he said.
And if a suitor does come along, talk to them; you may learn something. "Selling is just another business decision," said Teichman.
As businesses are increasingly making decisions about whom they want to hand over their data to, they're looking for organizations with stability, size and longevity.
Buyers look for companies that are a good cultural fit for the sellers, employees and customers.