Over the past few years, we’ve witnessed organizations across the board getting affected by a barrage of changes in how their business is conducted. While some industries have floundered, others, like unified communications, have flourished. More employees are jumping ship for opportunities that offer flexible work options. It’s led companies to adopt services that enable your team to work from anywhere. With the remote and hybrid work revolution growing, companies have turned to unified communications to help them conduct business in the “new normal.” One of the most adopted services has been cloud communications like UCaaS.
According to the 2021 State of Disruption Report, customer interest in UCaaS skyrocketed by 86 percent at the outset of the pandemic. While the report mentions that companies already had an interest in adopting UCaaS before the global pandemic, the disruption caused the shift to accelerate dramatically. Adopting cloud-based tools allows employers to empower their teams with the right technology, and gives them the opportunity to work at home or have a hybrid schedule. These models are here to stay, meaning we’ll also continue to see a rise in unified communications M&As as the market increases in value.
According to Gartner, software providers represented half of all acquisitions in 2020. It also shows that the second half of 2020 involved financial acquisitions of communications providers, which saw 93 percent growth, and acquisitions of service providers were 30 percent higher in the fourth quarter of 2020 than in the previous two years. Private equity loves recurring revenue, and private equity (PE) firms were involved as buyers in 49 of the 78 transactions in 2021, or approximately 63% of all transactions. Fast forward to today, 30 percent of MSP M&As involved private equity.
So far in 2022, we’ve witnessed MSP M&A activity occur at a furious pace. The total M&A deal count sits at 217, with 29 percent of these deals leaning heavily on MSPs. This is up 53 percent from the same period last year. Although we’ve heard that MSPs are worth more than 10X annual EBITDA, it’s important to note that a majority of M&A deals involve a more conservative valuation.
Private equity firms are sitting on a gold mine, with $1.5 to $2.0 trillion in “dry powder,” or money to invest. They’re interested in firms with valuations as low as $3 million, showcasing the potential growth in unified communications. Some MSPs are growing with the hope of being acquired by PE buyers, resulting in MSP buyers being more active than at the peak in 2019. M&As are once again accelerating to record levels, but how is that affecting the UC industry?
How M&As Are Affecting the UCaaS Industry
The figures listed above are enough to understand the drive behind M&As and why they’ve accelerated – but how are they affecting the unified communications industry as a whole?
To sum it up, it leaves less choice. Several vendors have chosen to roll up with the competition, leaving fewer options today than there were a year ago in terms of competing platforms on the market. Large organizations are opting to grow the business through M&A rather than organically. The result? Less competition, meaning price increases.
Another effect M&As are having on the unified communications industry is that you’re getting less innovation. At a glance, price increases aren’t always the primary concern for M&A. Mergers are likely to diminish innovation competition, meaning when technology should be evolving to dominate the competition, it could be put to rest and never make it to the market. M&As drastically reduce a firm’s innovation incentive, especially in high-tech industries like unified communications.
M&As have a profound effect on organizations and their employees. While most companies are the better for it, there will be times they buy or merge with another organization to boost growth or stave off the competition. However, an inability to integrate these two companies can lead to a failed M&A, which is the case in 70 to 90 percent of M&As, according to Harvard Business Review. It doesn’t matter the size of a deal – whether it’s $1 million or $100 million, it’s all risky.
If you’re considering an M&A for your organization, it’s crucial to ensure that you’re only doing it because you can’t achieve growth organically at the rate you’d like. If that’s the case, make sure it’s an easy transition. You need to think about each side of the equation and the platform you’re currently running. A vast majority are looking to be consumed, so you need to make yourself more marketable and attractive for a company to consume you.
The best outcome from an M&A is when minimal disruption happens to the end user, and the only thing they witness is a positive outcome. Merging with a company that has better support, new functionality, and innovation will have a profound effect on your success moving forward.
Since M&As have a clear impact on the industry, positive or negative, what factors drive MSP M&As?
What Factors Drive MSP M&As?
The UC space is nothing new – it’s been evolving since its rise to prominence in 2014. The Covid pandemic was the fan that flamed the fire and is responsible for the supercharged growth. Unified communications have quickly gained traction because communication and collaboration are at the foundation of business, no matter the industry. What pushes investors to consider M&A? There are some straightforward reasons these take place.
Competition is among the primary drivers behind M&A activity and why it happens in distinct cycles. Scooping up a company with an enticing portfolio filled with assets before its rival will set the market ablaze. A prime example of this is Salesforce’s acquisition of Slack.
Organic growth takes time that organizations don’t always have. We’re talking years, or in some cases, decades. To accelerate their objectives, companies will use M&A to grow substantially and surge past their rivals.
Another reason companies entertain the idea of M&A is to take advantage of synergies, when two organizations with similar businesses combine and consolidate duplicate resources. The money they’re able to save from this allows them to boost earnings per share, turning the M&A accretive. Some businesses have more products than the acquired company, leading to more revenue opportunities.
Depending on how you look at it, M&As have both positive and adverse effects on an organization and its industry.
Recurring Revenues Will Always Attract M&A
As UCaaS and the need for modern business communications continue to ramp up as more employees leave their current roles and seek remote or hybrid work, we’ll continue witnessing M&As in the unified communications space. Recurring revenue is attractive and will always attract M&A, despite the challenges and adverse outcomes resulting from them. However, there are positives that can’t be overlooked.
This is the second piece in our series of M&As. If you’d like to learn more about Service Provider Roll-Up Strategies, read our white paper, Accelerating M&A with an Agnostic UC Platform.