I can’t tell you how often I have been told, over the last several years, that the managed services market was ready for a massive consolidation. Well, it’s Q1 in 2015 and it hasn’t happened. Sure, there have been some noteworthy M&A deals in the past few years but nothing that would amount to a tidal wave of M&A activity.
So, what could explain a) the incorrect predictions of consolidation, and b) why there hasn’t been any significant M&A consolidation in over 10 years? Let’s examine the issue more closely.
If you speak it, it will happen
Uh, this is generally not the case. Self fulfilling prophesies are rare in life, rarer still in the managed services industry. It is entirely plausible, although I cannot guarantee this is true for everyone who told me MSPs would consolidate, that these individuals were hoping to create sense of panic in the market but getting enough MSPs to doubt their future and hopefully sell. Now, this is a very cynical view but I would wager that more than one MSP buyer out there was hoping this idea would take hold.
The other reason these buyers mack these statements is lack of intelligence. No, not real intelligence I mean actionable data. For example, if a MSP buys one MSP who is struggling, they may honestly believe that a majority of other MSPs are also struggling and are in need of a buyer. This thinking can be addictive, as well as incorrect. Why incorrect?
More Buyers Than Sellers
Here we depart from rumor and enter into reality. If you still believe that there has been or will be a consolidation of MSPs I ask you this question: why are there more buyers than sellers? It is true that there are many MSPs (and other entities) who are eager to buy companies with managed services capabilities. The odd thing is there are clearly more buyers than sellers.
While it is commonly said that every company has its price, there is an obvious separation between those MSPs who want to sell and the larger majority of MSPs who want to buy. In my opinion, there are far more buyers than sellers and that tells me a lot about the state of affairs in the managed services profession today.
My views on MSP valuations are well known to anyone who reads this blog or has seen me talk. For the vast majority of MSP owners, the future holds a great deal of promise and growth. This is the only reason I can think of for why there aren’t more sellers out there. When approached by the typical buyer, many MSPs will reject the offer and opt instead for continuing their path towards the future.
Explanation of Major MSP Acquisitions
If you are wondering why there have been some significant MSP deals over the last few years, there are some easy explanations for why they happened. Whether you are talking about the mindSHIFT, Thrive Networks, All Covered, or another MSP purchase, the purchasing companies were always seeking to acquire MSP capabilities where they had none previously. The buyers were also publicly traded entities who had plenty of cash to make such deals happen. It is also worth mentioning that these acquisitions (at least the mindSHIFT and Thrive) ended up unraveling (see my analysis on each of these acquisitions elsewhere on this blog).
I am a big believe in mergers and acquisitions when appropriate. I am not, however, a believer in creating false expectations. If you ask the average MSP owner, they would probably reject a proposal to buy their company. Whether they do so because the valuation is too low, the cash insufficient, or the terms too risky, MSPs are choosing to stay in the profession and wait. By my reckoning, this means things are looking pretty good for MSPs and the future.