Despite diminished volume in the first half of 2024, merger and acquisition (M&A) activity in the North American IT services space vastly exceeded pre-pandemic levels, according to a report from middle market investment banking firm Corporate Finance Associates (CFA).
"Although the volume of M&A activity in the first half of 2024 in the North American IT services industry fell slightly from the first half of 2023, it vastly exceeded the pre-pandemic levels," said John Holland, managing director, CFA, and author of the report. "Therefore, from a historic perspective, the current volume of M&A activity in the North American IT services market is robust. Whenever interest rates descend in the near future, the volume of M&A transactions will likely surge," Holland told ChannelE2E.
Increasing Demand for Cybersecurity Solutions
The report, Mergers and Acquisitions in the IT Services Industry in Q2 2024, tracked M&A activity and unearthed some interesting trends in the space, including the explosive growth in demand for cybersecurity solutions.
"Capital always finds growth opportunities. Cybersecurity solutions providers offer enormous growth potential to investors (e.g., private equity firms or public capital markets)," Holland said. "We are approaching the 10th anniversary of the notorious hack of Sony’s IT systems. The catastrophe was a wake-up call to the corporate world as well as local, state and national) governments. Since then, we have observed major hacking incidents on almost a monthly basis; for example, the recent hack of casino and hotel giant MGM. And hospitals, schools and small businesses are attacked by ransomware daily," Holland said.
These ongoing incidents have forced governments and corporations to respond by boosting their cybersecurity budgets and, consequently, cybersecurity solutions providers have enjoyed spectacular growth, and the outlook is fantastic, Holland said. The cybersecurity services sector is poised for incredible growth as large IT solutions providers like CDW acquire cybersecurity specialists in search of cybersecurity talent, while private equity firms acquire cybersecurity solutions providers in search of scale, he added.
"Many of the acquisitions also have involved cybersecurity solutions providers that service the U.S. government. Obviously, the U.S. government will need cybersecurity services for many years to come!" he said.
Outside of cybersecurity, there were many acquisitions of solutions providers that service the U.S. government. In April, Virginia-based national security solutions provider VTG Group acquired Ohio-based digital transformation and cloud solutions provider Vana Solutions. In June, VTG acquired Virginia-based Clear Cloud, a provider of cloud solutions to the U.S. intelligence community. VTG is a portfolio company of private equity firm A&M Capital Advisors, Holland said.
Industry Consolidation Continues
Consolidation within the industry is also continuing, Holland noted, adding that in industries where there are economies of scale, industry consolidation eventually occurs. The factors driving consolidation differ depending on whether the acquiring companies are looking to scale or improve earnings growth, he noted.
"Larger IT services businesses are acquiring smaller IT businesses to scale, secure talent in key technologies, diversify services or expand geographically. Meanwhile, private equity firms are acquiring IT services businesses in search of earnings growth that other industries do not enjoy. Some IT sectors attract more attention than other sectors. For example, MSPs have been very hot for several years," he said. But private equity is driving consolidation within the MSP sector, and there's evidence that this is creating greater performance, profitability and efficiency, Holland said.
"Private equity firms are ... attracted to the relatively recession-resistant recurring revenues and the potential earnings growth. The MSP sector is very fragmented with thousands of tiny MSPs, and there are dozens of private equity firms are orchestrating roll-ups of those small MSPs. There is empirical evidence showing that MSPs owned by private equity firms outperform founder-owned MSPs in terms of revenue growth, profitability, efficiency and other metrics," he said.
The biggest MSP deal was the acquisition of The Purple Guys by the MSP NTIVA (backed by the private equity firm PSP Capital), Holland said. Also, he noted the U.S.-based private equity firm The Riverside Company acquired the largest Australian MSP Virtual IT Group. The Riverside Group owns the large U.S.-based MSP Logically, Holland said.
Holland added that cloud solutions providers were also in high demand, with many acquisitions of cloud solutions providers with AWS, Azure, and/or Google Cloud expertise, including nClouds' acquisition of Foghorn Consulting. Foghorn partners with AWS, Azure, Google Cloud and Docker, and nClouds is a portfolio company of private equity firm Charles Thayne Capital. There were also many acquisitions of hosting firms, data center operators and colocation providers; for example, Colohouse acquired bare metal hosting firm Hivelocity.
