Channel M&A Is ‘Rampant’ With No Slow Down In Sight

‘There’s lots of different reasons for M&A, but our conclusion was, it’s basically around skills, people and capabilities. That’s what folks are buying and that’s what is important,’ says Mark Williams, a senior consultant for CRN parent The Channel Company.

The amount of mergers and acquisitions taking place in the channel is soaring to record heights as solutions providers of all shapes and sizes are getting approached by companies on almost a daily basis.

“I had absolutely no idea there were so many firms out there looking to purchase smaller companies like us, I mean, we get approached probably two to three times a week,” said Dawn Sizer, CEO and co-founder of 3rd Element Consulting, a fast-growing Mechanicsburg, Pa.-based managed service provider (MSP). “We’re a small company but we get emails, we get LinkedIn messages, we get phone calls – it’s just constant. It’s really crazy the amount of M&A that’s going on right now.”

The amount of money private equity and investment firms are investing in the channel is reshaping the partner landscape, while at the same time larger solution providers are seeking to expand their reach via M&A.

Approximately 20 percent of all of the Solution Provider 500 companies are involved in M&A activity, according to new research from CRN parent The Channel Company. Around 50 percent of the largest top 100 solution providers in the world on CRN’s Solution Provider 500 list are currently involved in M&A activity, while about 8 percent of the SP500 companies have been acquired.

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The channel M&A data was unveiled during the XChange 2020 conference in San Antonio on Monday. During the event, hundreds of solution providers were asked to participate in a real-time poll asking if they have had M&A conversations in the past 12 months. A whopping 74 percent of the solution provider executives in the audience reported having M&A conversation over the past year.

One solution provider that is currently looking to acquire is Envision Technology Advisors, a Pawtucket, R.I.-based consulting specialist.

“I just had dinner with someone last night that I’m speaking to about possibly acquiring his company,” said Karen Penticost, vice president of Business Development and Strategic Partnerships for Envision. “The way that Envision has found to be most successful over the years in terms of growth is to acquire.”

For example, a few years ago Envision acquired a web development team from a Providence, R.I.-based company. “We always did that piece of business -- application development and web development -- but this gave us 11 more employees to grow it. Now we’re looking to acquire in the Microsoft stack space and MSP space.”

There are five top areas of interest potential buyers are looking for in a solution provider, according to Mark Williams, a senior consultant for The Channel Company and founder of MRamsey Consulting. Those key areas are cloud, managed services, product offering, application development and integration, and digital transformation.

“Some of the bigger companies were actually buying products [via M&A). So they actually needed to fulfill their products and support their product offerings so they were acquiring services organizations to do that,” said Williams.

One huge area of interest from potential IT buyers is around the people and capabilities inside a solution provider.

“There’s lots of different reasons for M&A, but our conclusion was, it’s basically around skills, people and capabilities. That’s what folks are buying and that’s what is important,” said Williams.

3rd Element Consulting CEO Sizer said capturing a company’s talent is top of mind for people who are looking to buy a fast-growing solution provider like hers.

“They are trying to pull talent into other places where they can’t get it. So buying a company like us helps that,” said Sizer. “All my people stay with me. I have top talent. So how much would that cost for them to really go out to find and hire them? So I get it. For a big company, it would honestly be worth it for the 10 people we have, especially if you keep the talent and keep the client. I get it, but M&A offerings for us has been rampant over the last year or two.”

Linda Rose, an expert technology M&A advisor for RoseBiz, said solution providers looking to be acquired should focus on driving recurring revenues.

“Making that transition to recurring revenue does take quite awhile. That even means taking what you bill now on a time and material basis, wrapping that up into a package and selling that on a monthly basis,” said Rose. “You’re really looking at a three or four year transition period.”

Having a healthy mix of services versus product revenue is key for solution provider seeking M&A, according to Brad Badgley, director of M&A for Evergreen Services Group.

“It’s depends on what your revenue mix is, what the size of the business is,” said Badgley. “If we go look at a business and it’s 90 percent product revenue, that’s going to get valued completely differently than a business that is 90 percent recurring revenue.”

As M&A becomes even more prevalent in the channel this year, solution providers will need to juggle the constant offers from potential buyers as well as seek mergers themselves with other channel partners to expand their capabilities, skills and geographic reach.

“Right before I came to XChange, I posted on LinkedIn and Twitter saying I was heading to XChange 2020. I almost immediately had somebody reach out to me from a company in New Jersey who wanted to meet [to discuss M&A],” said Envision’s Penticost. “These discussions about mergers and growth strategies are happening more and more – I don’t see it stopping any time soon.”