In our series on MSP M&As based on the white paper, Service Provider Roll-Up Strategies: Accelerating M&A with an Agnostic UC Platform, we’ve discussed a host of topics, ranging from how UCaaS M&As are at an all-time high, how M&As are affecting unified communications, the top challenges MSPs face for M&As, and the central component of MSP M&A success. MSP M&As were on fire in 2021, a trend that remains hot in 2022. However, it begs the question – how can you create unified communication businesses built for M&A? We’ll delve into that below.
According to a Bain & Company report, M&A in the telecommunications industry rebounded dramatically in 2021 from the year prior. Deal values rose 48 percent with record-high multiples across most subsectors. Primary investments grew a resounding 100 percent in 2021, and the private investment momentum will persist as long as private telecom valuations stay higher than the listed telecom valuations.
One thing we’ve learned about the telecommunications industry is that it’s resilient – and 2021 gave us the clarity we needed to see that. The economic uncertainty as a result of the pandemic caused M&As to decline across the board. Even with that, infrastructure deals were up 18x in 2021, up from 14x in 2020. Private investors maintained their interest in the sector for all deal types, stemming from higher transaction multiples for private transactions than public trading. According to the same report, the total value of these investments reached $79 billion in 2021, up significantly from $39 billion in 2020.
M&A activity has been unprecedented for MSPs, leading to a new phenomenon known as the “Super MSP.” The term comes from the most recent 2022 ConnectWise MSP Threat Report, which highlights that super MSPs have evolved as a result of the high levels of M&A activity in this sector. The report also mentions that “as private equity enters the channel, deep financial pockets have given way to a super MSP. Mergers and acquisitions have brought MSPs together, spanning the continent and merging into complex, competent, fast-growing organizations.”
All of these variables and the impressive growth of M&As have led to many unified communication businesses wondering how they can create a business built for M&A. Below, we’ll explain what you need to make that a reality.
How to Create a UC Business Built for M&A
Creating a UC business built for M&A is possible, and service providers that deploy vendor-agnostic UC platforms can rapidly identify, acquire, and consume acquisition targets. It provides them with the freedom to choose a wide range of businesses, followed by a quick integration into a centralized platform.
Let’s look into some of the benefits of deploying a vendor-agnostic unified communications platform:
- More choices in acquisition targets: Service providers that are no longer reliant on acquiring other business that offer a similar UC platform enable them to identify a business at the right price point and focus on synergies instead of technology.
- Rapid integration translates to ROI: Service providers have the means to integrate new acquisitions, switch off legacy platforms and systems, and accelerate the realization of accretive value. In that same breath, when vendor-agnostic platforms can deliver higher margins, it means the ROI will be much faster. The right platform allows service providers to sell services with 20 percent higher margins.
- Increase loyalty while reducing churn: When existing platforms’ features and capabilities are cloned, and user experience is consistent, customers won’t have a reason to change providers.
- Upselling new services with ease: When your customer has their services migrated with ease, your organization has excellent potential to upsell new services to them and expand your existing relationship. If the customer is pleased with their migration and service hasn’t been interrupted, they’ll be more open to growing and expanding their existing services.
- Adaptability: Unless you have a crystal ball, it’s impossible to predict where UC is heading. While it’s enjoyed an incredible few years due to the pandemic and proven its resiliency in an unstable market, there’s no way to know what’s next. For now, a vendor-agnostic platform enables the service provider to continually adapt and serve the changing needs of their customers while integrating new platforms that emerge, letting them ride the wave unified communications are experiencing right now.
- Rapid Roll-Up & Faster M&A: If the objective is M&A, these steps will allow service providers to move faster to acquire and integrate acquisitions, leading to the acquisition of more companies. The speed at which they can scoop up a new acquisition will put them at a significant competitive advantage.
Creating a business built for M&A can be challenging, but it’s not impossible. Simon Howitt, CEO of inTEC, had a comment. “From the investors point of view, service providers in the UC space offer recurring revenues, recurring margin, long contract lengths, low churn, and an opportunity to scale. We are offering essential business tools and there’s massive growth in the move from on-prem PBXs to hosted voice. UC business have characteristics that the financial community is attracted to. We have been able to make three acquisitions that have grown each year by more than 40% EBITDA over three years. It proves that we can deliver value.”
What Does Good Look Like? Achieving the Best Roll-Up Outcome
If your business is ready and you’ve done everything the right way, there are still things to consider. You will face some challenges after an acquisition, including a technical skills gap, long-term strategy execution, getting your employees on board, and communication problems, to name a few. You might be wondering – what does good look like?
For service providers, achieving the best roll-up outcome will consist of the following:
- Flawless execution
- Minimal customer problems
- Efficient use of central resources
- Centralized control that’s achieved quickly
- Rapid execution of synergy benefits, economies of scale realized
- Better return on investment (ROI)
For end-users, achieving the best roll-up outcome will consist of the following:
- Clear communication
- Minimal disruption
- Immediate perceived benefit, including UX and support enhancement
- Trust is built that you can depend on
It’s simple on paper, but how do you achieve this?
What’s Required for a Positive Outcome?
By cloning the services that you migrate, you’ll minimize the change. You can also keep existing devices, dial plans, function codes, settings, rules, and underlying carriers, translating to minimal disruptions for end-users. What else can help you achieve the best possible results?
- Having a vendor-agnostic platform
- Broad support across various device types & manufacturers
- Extensive functionality
- The ability to create unique service packs multiple times and working in parallel
- Extensive call control
- Branding control throughout the process
Above is what’s required to achieve the best outcome, below are examples of what the best outcome looks like:
- Rapid acquisition with accretive benefits, which are realized fast
- Robust visibility and customer control
- Satisfied customers that trust your business practices
- An enhanced ability to serve customers with additional functionality, which will help increase ARPU
What Are the Consequences of Not Doing This?
Perhaps the approach you’d like to implement is different from what you’ve read – what are the consequences of not following the advice above?
- Altered functions that may no longer be available, leading to disruption for end-users
- As you try to resolve the end user issues, it could lead to delays that affect the entire organization
- The trust you’ve spent countless years earning from your end-users will erode
- Replacing devices, which will lead to higher prices, equating to lower ROI
- Unexpected costs, service credits, and protracted timelines
- Increased distraction among management and the inability to move forward
- The burden of maintaining dual support systems
- Functionality compromise
We’ve described some of the consequences if it’s not done, so what does a poor outcome look like?
- Execution will cost more than initially thought
- Synergy takes far longer to realize, leading to the cadence of the roll up being slowed down
- Much lower accretive benefits
- Many lost opportunities
- Perhaps the hardest to stomach – lower ROI
What Does the Future Hold for UC M&A?
If the statistics hold any weight on the future of M&A in the telecommunication industry, then we know this is only the beginning. The pandemic was brutal for many organizations, but Unified Communication as a Service (UCaaS) shaped how we conduct business. There is a perfect storm brewing, and the UC market consists of growing customer demand, various platforms, and business owners that want to take advantage of this wave and either cash-out or consolidate. However, both of these scenarios require an overhaul of current platform strategies and deploying the right technology to enable M&A.
At this stage, service providers have focused more on technology instead of the actual business outcome. Fortunately, opportunities exist to refocus on enabling M&A and rapidly consolidating the market. The future for UC M&A is bright, and it appears it will continue on the same upward trajectory it’s been on to this point.If you’d like to learn more, make sure to check out our white paper, Service Provider Roll-Up Strategies: Accelerating M&A with an Agnostic UC Platform.