Channel M&A Catching Up To Pre-Pandemic Pace
A flurry of recent acquisitions suggests deal-making in the channel is returning to the consolidation frenzy that characterized 2019 as solution providers look to come out the pandemic stronger than before.
There’s been a flurry of channel M&A activity in recent months, with several large solution providers buying smaller ones against the backdrop of a global pandemic.
While COVID-19 has ground deal-making to a halt in many industries, that trend isn’t holding true in the technology sector. And the coronavirus is clearly no longer putting much of a damper on what had been an energetic buying season in the IT channel, although it looks to some extent to be altering the dynamics of individual deals, said Linda Rose, technology M&A advisor and CEO of RoseBiz.
“Now people have a better vision of where things are headed, how they’re doing business. A lot of partners have maintained revenue, if not gone up, so some are starting to get back in the game,” Rose said.
Many solution providers offering remote work solutions, as well as managed cloud, collaboration and security services, are now, nine months into the pandemic, more attractive to buyers than ever before, Rose said.
“If you can prove your revenue has gone up in this COVID time period, you’re pretty much recession-resilient. So those people are getting multiples much better than they would have when COVID started.”
Of late, several channel heavyweights have gone on buying sprees.
Global systems integration giant Accenture has bought several consultancies amid the pandemic, most of them outside the U.S. So has Cognizant, which agreed to buy New Signature in July, 10th Magnitude in September and BrightWolf in October.
Among many other notable deals, Trace3 looked to expand its geographic footprint in November with its purchased o Groupware Technology, and AHEAD bought RoundTower Technologies and Kovarus in September.
“Quality companies are still being bought for the skills that are required,” Rose said.
Private equity is also getting in on the action. After going into cash-saving mode, large investor funds are sitting on something approaching $2 trillion of “dry powder,” Rose said, “and they need to spend it.”
That’s driving deals like the acquisition of the aforementioned AHEAD by two private equity firms this past September.
Channel consolidation was rampant just before the pandemic, coming off the heels of a busy 2019 in which 20 percent of the CRN Solution Provider 500 was involved in M&A activity, said Mark Williams, senior consultant for the IPED Consulting arm of The Channel Company, parent of CRN.
In early March 2020, at the last The Channel Company XChange conference that took place as an in-person event, 73 percent of attendees said they were considering M&A activity in 2020, Williams said.
But the sudden onset of the crisis later that month largely hit the pause button as everyone waited to see what impact the coronavirus and subsequent lockdowns would have on the economy and the industry. Even when negotiations resumed months later, restrictions on travel and lack of accessibility to facilities slowed due diligence, Rose said.
The altered but strong market fundamentals that have emerged are now closing the backlog, although the overall number of deals is unlikely to catch up to last year—or what it would have been under normal market conditions, Rose said.
But, importantly, there are no signs of distress sales, she said, and valuations have stayed mostly level if they haven’t gone up.
One dynamic that has visibly changed are the terms of deals, with notes or earnouts more common as companies try to conserve cash, Rose told CRN.
Navisite CEO Mark Clayman has been closely watching those dynamics unfold as the Andover, Mass.-based consultancy he leads looks to emerge from the crisis stronger than before.
In June, the company bought Privo, an Amazon Web Services consulting partner, and earlier this month closed a deal for Dickinson + Associates, a Chicago-based SAP consultancy.
“We want to be in a stronger position when COVID eases up and we can be running a little harder with a larger portfolio of services targeting our midmarket customers,” he said.
Those Navisite acquisitions, like most others across the industry, were initiated before the pandemic. Deals in play pre-COVID are now coming to fruition, Clayman said, even as buyers accept they need to be patient to see returns.
“We all realized that everybody was taking a bit of a pinch because of COVID. But let’s think about when COVID can potentially end. All are hoping by late spring, early summer, we’ll be in a different place, back to some sense of normalcy,” he told CRN.
Clayman doesn’t expect a full return to the previous pace of channel consolidation until at least the back half of the year.
“There are a number of deals that never happened because of COVID,” Clayman told CRN. “Either the buyer or the seller just was unsure, even near term, is it going to rebound after COVID?”
And the M&A process requires a little kicking of the tires, which isn’t easy these days. Companies are questioning: “Can I get to know the business well enough? Can I get to know the culture well enough? Can I support the business after the process, especially when both businesses are contracting?”
That’s before other novel factors come into play, like Paycheck Protection Program loans, he said.
In the meantime, as Navisite and other solution providers that executed acquisitions wait for business activity to return to normal, it’s a good period for integrating companies, planning marketing campaigns, and focusing on selling back into the existing customer base, since signing new customers is a challenge.
“You can’t force it in this environment,” Clayman said.