MSP Mergers and Acquisitions: On Hold or Moving Forward?

What does the coronavirus pandemic mean for MSP mergers and acquisitions? ChannelE2E has some strong opinions. But we also wanted to open the conversation to third-party experts.

Among our first moves: Reaching out to Ramsey Sahyoun at Evergreen Services Group, a private equity-backed investment firm that has acquired and/or invested in more than a dozen MSPs (heck, it's likely 20 by now) over the past two years or so.

ChannelE2E: Let's start with pending deals that are nearly done: Will they get done or be put on hiatus?

Sahyoun: We've got two MSPs under LOI (letter of intent) right now and have every intention of closing them. We're as committed as ever to investing in the MSP market. I do anticipate things taking longer than normal because we can't do some of the important things like meeting in person and touring the facility. In the meantime we're trying to get as much done as we can remotely and using video chat - it's actually working pretty well! We're working on a number of other opportunities that are closer to LOI and those are progressing but definitely slowing down. We've also paused all outreach to potential sellers for the time being. People are dealing with a lot right now and we didn't feel like it was the right time to ask people if they'd consider selling.

ChannelE2E: Let's look at the market in terms of MSP buyers vs. MSP sellers: Are buyers now in the driver’s seat?

Sahyoun: The private markets take much longer to react than the public markets, so we haven't noticed any dramatic change yet. I think buyers that have committed capital and have stayed disciplined over the past few years will be in the driver's seat and those that haven't will probably back off or disappear, which will create a more buyer friendly environment. With M&A, two parties need to come to an agreement that makes sense for both sides, so people are never getting ripped off unless there is some unique circumstances that causes a seller (or buyer) to be desperate. We try to buy strong, healthy businesses with a lot of recurring revenue, so I've yet to do a deal with a desperate seller.

ChannelE2E: Has the seller mindset changed at all? For instance, are sellers more flexible on valuation now? 

Sahyoun: We haven't noticed a change in valuations yet. Business performance will undoubtedly suffer and multiples will compress as the credit markets tighten up. So there will be a significant impact to business value (perhaps as much as 30 percent, which is in line with public markets), but people don't react immediately in private markets. I think most people are really underestimating the negative business impact or are just in denial about it. We're bracing for the absolute worst with the MSPs we own and there is no getting around the fact that revenue and earnings will decline as a result of this. We hope that it bounces back, but are prepared for a longer term negative impact and fortunately have left a lot of capital on the sidelines for times like this.

ChannelE2E's Perspectives

Generally speaking, we're aligned with Evergreen's perspectives. Particularly:

We'll share more thoughts soon.