Managed services News
MSP M&A Trends: Recurring Revenue Is The Hot Ticket
‘Typically an MSP will have three-year contracts with clients so that business is pretty safe for three years, even if there’s a recession. It’s very difficult for the end customer to divorce itself from an MSP, so that makes these companies very valuable,’ says John Holland, managing director of Corporate Finance Associates.
The merger-and-acquisition sector of the IT industry has been red-hot for the past two years, but that all may change.
With a potential recession and higher interest rates, experts are predicting a dip in M&A. But that depends on the business.
“The great ‘land grab’ of MSPs will likely continue in 2023,” John Holland, managing director of Corporate Finance Associates, told CRN. “So many private equity firms feel an imperative to be in that MSP space. Larger MSPs are backed by private equity firms that are highly motivated to scale these recurring revenue businesses through acquisition. Similarly, the ‘land grab’ of telecom agencies will continue.”
Laguna Hills, Calif.-based Corporate Finance Associates is an investment banking firm with decades of experience in executing mergers and acquisitions in the IT and telecom services industries.
And according to its latest report, “Mergers & Acquisitions in the Technology Services Industry in Q4 2022,” the numbers seem to show a shaky 2023 and, possibly, 2024.
The number of IT services M&A transactions increased from 435 in 2020 to 675 in 2021 to 656 in 2022, according to the report. The company with the most M&A deals in 2022 was Dublin, Ireland-based Accenture with 25, followed by The 20 MSP and Upstack with 12 each, and Converge Technology Solutions and Ernst & Young with 10 each. The aggregate value of IT service M&A transactions increased from $36 billion in 2020 to $72 billion in 2021 but dropped to $51 billion in 2022.
“The Federal Reserve started raising interest rates in March 2022 and continued raising interest rates throughout 2022 and early 2023,” he said. “Rising interest rates elevate the cost of capital of acquirers, whether those acquirers are private equity firms or large corporations. Therefore, rising interest rates tend to subdue M&A volume and diminish valuations of IT services businesses in the same way that higher mortgage interest rates cause home prices to decline.”
Last year, Holland said there was a “little bit of a slowdown” because the Federal Reserve started increasing interest rates and kept doing so throughout the year.
“We don’t know if there will be a recession in 2023,” he said. “And if there is, we don’t know how bad it will be. Normally what happens is you see the IT services companies stop growing in terms of revenue and the customers start pulling back, cutting their IT budgets.”
Here are five things to know about M&A in the MSP industry and what’s to come in 2023.