ChannelE2E has already tracked more than 200 technology merger and acquisition (M&A) deals in 2020. 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 200 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 trends for technology M&A -- spanning January through early May 2020…
1. M&A Slows Down... Then Re-Accelerates: Amid the coronavirus pandemic and associated economic fallout, the number of M&A deals tracked by ChannelE2E slowed considerably in early April. But M&A announcements accelerated considerably toward the end of April.
2. MSP Acquisitions: Forty-six of the year's first 200 M&A deals involve MSPs. Of those deals, private equity firms were involved in 25 of the 46 MSP acquisitions.
3. Speaking of Private Equity…: Yes, PE firms remain active. Of the 200 M&A deals, private equity firms were involved in 64 of the transactions. Buyers and investors in recent days include Apax Partners, Thomson Street Capital Partners, TriSpan Opportunities Fund, TPG Capital, and Investcorp. Technology Partners.
More M&A deals and private equity investments are a safe bet, though the coronavirus pandemic has slowed deal flow and inspired PE firms to carefully recalibrate existing investments.
Still, private equity investors were sitting on a record $1.5 trillion in cash during Q1 2020, according to data from Preqin. 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 trying to carefully move deals forward while avoiding more pandemic fallout.
4. Application Partner Consolidation: M&A within the SAP, Salesforce, Microsoft and WorkDay partner ecosystems remains strong. Of the first 200 M&A deals of 2020, 23 have involved those partner ecosystems.
Related...
5. ServiceNow Partner M&A: During the two weeks 2020, we were surprised that no ServiceNow partner buyouts occurred. But we knew deals were coming -- based on ServiceNow market growth, strong demand for consulting services, and a shortage of skilled pros in the ecosystem. Fast forward to present day. Five ServiceNow partners have been acquired so far in 2020. Buyers include BG Staffing, ICF, KPMG and ServiceNow itself. One of the deals was valued at nearly 19 times EBITDA.
6. Cybersecurity & MSSP Acquisitions: The sector remains hot. Thirty-eight of the 200 deals involved cybersecurity companies. Five specifically involved MSSPs. Here's a regularly updated list of MSSP mergers and acquisitions, extending back to January 2018.
7. Most Active Buyer - Accenture: We predicted Accenture will acquire between 20 and 40 technology firms in calendar year 2020. Fast forward to present day. Perhaps we should revise our prediction upward. Indeed, Accenture has purchased at least 15 companies since January 2020. Most deals focus on cloud, cybersecurity and digital transformation services. Accenture's M&A budget for fiscal 2020 is $1.6 billion.
- Related: Complete list of Accenture acquisitions.
8. Public Cloud Partner Acquisitions: Nine buyouts have involved public cloud partners that support Amazon Web Services (AWS), Microsoft Azure and/or Google Cloud Platform (GCP)
9. Fiber Optic Networks: Five deals involve fiber optic networks and regional broadband providers.
10. Valuations: In many deals, valuation and purchase price remain closely guarded secrets. Only 11 of the 200 deals revealed the valuation -- which is typically based on EBITDA multiples or revenue multiples. Sources say MSP valuations remain steady -- though the deal terms are changing amid the coronavirus pandemic and associated business risk. Instead of paying up-front, buyers are shifting a portion of the deal to earn-out scenarios that pay sellers based on ongoing business performance.
MSP Valuation Clues
In some rare instances, we’ve seen some MSP valuations reach beyond 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.
