We're only about one week into the New Year, and ChannelE2E has already tracked more than 25 technology merger and acquisition (M&A) deals. Many of the buyouts involve MSPs (managed IT services providers), IT consulting firms, ISVs and private equity firms.
But what trends can we glean from the first 25 technology M&A deals of 2020? First, here's a look at the 2020 M&A list so far -- which we continue to update daily.
Now, the 10 early trends for technology M&A in 2020...
1. Channel M&A Involves More Than MSPs: Five of the New Year's first 25 M&A deals involve MSPs -- including such buyout and investment targets as Dataprise, InterDyn Artis, JHC Technology, Options Technology, and the West Monroe Partners' MSP division.
No doubt, MSPs remain hot M&A targets mainly because (A) the market is so fragmented, (B) private equity firms crave recurring revenues and (C) money remains cheap to borrow and apply to buyouts. But let's not forget, 20 of the first 25 M&A deals of the year did not involve MSPs.
2. Speaking of Private Equity...: Yes, PE firms remain active. Buyers and investors in recent days include Abry Partners, Accel-KKR, Frontenac, Insight Partners, M/C Partners, One Equity, and Trinity Hunt Partners.
More M&A deals and private equity investments are a safe bet. Indeed, private equity investors are sitting on a record $1.5 trillion in cash, according to new data from Preqin. Yes, that’s trillion — with a T. That is the highest on record and more than double what it was five years ago, CNBC reports. Amid that reality, private equity firms are scrambling to make investments.
3. Application Partner Consolidation: M&A within the SAP, Salesforce and Microsoft partner ecosystems remains strong. Of the first 25 M&A deals of 2020, six have involved those partner ecosystems.
4. ServiceNow Partner M&A: No deals so far. But we suspect M&A deals involving ServiceNow partners will surface in the next few days, with big ServiceNow partners buying up boutique firms in the fast-growth market that suffers from a talent shortage.
5. Cybersecurity & MSSP Acquisitions: The sector remains hot. Confirmed acquisitions in recent days include Armis, Avnet Data Security, Bay Dynamics, Segasec, and Symantec Cyber Security Services.
6. Vertical Markets Help: Five of the first 25 deals involve vertical market IT specialists in such areas as health care, government and financial services.
7. Repeat Buyer: Accenture remains one of the most active M&A participants, having already nailed down two deals in 2020. We suspect the company will acquire between 20 and 40 technology firms this year. Most will focus on cloud, cybersecurity and digital transformation services.
8. Bidding War: Stay tuned for a multi-billion dollar buyout of a distributor. Two companies are locked in a bidding war for the business.
9. Debt?: Low interest rates and plenty of lenders means some M&A deals may be loaded up with lots of debt. We're poking around to get a feel for the debt loads and the potential long-term implications.
10. Valuations: In many deals, valuation and purchase price remain closely guarded secrets. Only three of the 25 deals revealed the purchase price, and none revealed the EBITDA multiple.
MSP Valuation Clues
Still, our sources provide plenty of valuation clues.
In some rare instances, we’ve seen some MSP valuations reach 8X to 10X annual EBITDA. But ChannelE2E cautions managed IT service provider (MSP) buyers, sellers and financiers: Those lofty valuations are extremely rare deals, typically involving larger MSPs with strong annual recurring revenue growth and healthy profit margins. Or in some cases, a desperate buyer willing to overpay.
The more reasonable valuation ChannelE2E has heard is 6.5X annual EBITDA — with many deals ranging from 4X (yes, that low) to 8X annual EBITDA, based on a range of factors (cash up front vs. earnout, percentage of revenues from monthly recurring services, etc.), according to ChannelE2e interviews with key M&A sources.
To estimate your potential valuation, check out the MSP Valuations worksheet from Evergreen Services Group, a private equity-backed team that has acquired and/or invested in more than a dozen MSPs.
