As normality ramps up and the pandemic becomes an afterthought, M&As are again happening at historic rates. According to a recent Bain & Company report, some tech acquirers are doing up to 30 deals per year, which equates to one every two weeks, allowing them to streamline the integration process and focus on value creation. Major tech companies are scooping up dozens of small companies in deals that cost less than $500 million. This figure represents 96 percent of all big tech M&A. With this many deals on the table, we tend to overlook some of the challenges these organizations face.
Companies are spending more than $2 trillion each year on acquisitions, a substantial figure. Amid the growth, MSP owners are looking to get back in the driver’s seat after the global slowdown caused by the pandemic. Data released by Kaseya from their 2021 Global MSP Benchmark Survey Report found that 26 percent of MSPs are actively looking to acquire other MSPs in the next 24 to 36 months, while eight percent are investigating selling their MSP within the same period. The other 66 percent had no plans to acquire or sell their MSP.
The volume of MSP M&As reflects the interest of private equity in the space. Private equity loves monthly recurring revenue, and this is the perfect outlet for their desire. It’s leading to larger organizations and firms having a more significant interest, especially in the unified communications sector, as demand for remote and hybrid work solutions soars.
Although these figures have restored hope after a long and twisty uncertain road, there is one thing to consider that we’ve mentioned before – 70 to 90 percent M&As will fail, according to Harvard Business Review. M&As are significant risks, but when carried out successfully, they yield hefty rewards. The risky business is centered around executing the deal while overlooking the challenges you’ll face once complete. So, what are the primary risks you’ll encounter? Long-term integration and customer management.
The MSP market is red hot – denying that reality would be like trying to convince someone water isn’t wet. Many organizations are riding the MSP M&A wave. However, you must consider that MSPs endure unique hurdles to succeed after an M&A, but how is that success measured? Success is defined by businesses who identify more value targets, execute the transaction, then realize the accretive upside through enhanced revenue opportunities across the customer base.
Below, we’ll examine the top five unique MSP M&A challenges. We’ll also look into the strategies and technologies service providers must have in place to overcome these hurdles, as well as some post-merger issues they’ll endure.
Top 5 Unique MSP M&A Challenges
As was mentioned above, each industry will encounter challenges when merging, especially if it’s a different industry than what they’re accustomed to working with, but what issues do UC organizations face?
You’ll seldom find acquisition targets closely resembling the acquirer when it relates to technology, customer base, or offered platforms. What you’d consider a “good fit” acquisition, a target with similar profiles, is challenging to find and typically a lot more expensive to acquire. For that reason, one significant challenge the industry faces is limited targets.
Integrations Are Complex
Acquisitions across all industries are notoriously challenging to integrate. However, in the Unified Communications sphere, service providers must integrate existing UC platforms. They do this by migrating users to a new service they’re unfamiliar with using or duplicating systems and operating multiple platforms. What could go wrong with that? Well, a lot, actually. These are costly, complicated options that reduce your ROI in the short and long term. Another significant risk is customer disruption – the service provider might be under the impression they’re buying 2,000 customers, but that figure is dramatically reduced if customers are forced to change their behavior. A vast majority of customer bases aren’t managed well. If they’ve moved past their contract period and are on monthly rolling contracts, you shouldn’t give them a reason to seek alternative offers.
When you take the time to integrate each UC solution, not only is it resource-intensive, but it’s going to take a significant portion of your time. Back office processes, including billing systems, ordering and provisioning, and customer support, must be rationalized and simplified to prevent duplications. It hinders management teams and operations that should be optimizing services for enterprise customers.
Technical Skills Gap
If the acquired organization is using a different platform than the service provider, you will encounter a skills gap. When it comes to technical teams, their allegiances typically lie with the vendor. Why? They favor technology they’re familiar with and are used to leveraging with their personal domain experience. Unfortunately, this can be costly for the business. Technical management often promotes the solution best for them but not the right one overall.
Long-Term Strategy Execution
Most service providers will have the ability to acquire one or two companies and manage the challenges that follow. However, once they begin rolling up multiple organizations at a time, they’ll notice a substantial drop in their ROI. They’ll be unable to move from one acquisition to another or add strength to the next without creating a technology strategy to support the M&A.
Post-Merger MSP M&A Challenges
Merging with another organization is tricky. The most efficient means of combating some challenges associated with M&A is to find an organization that has a similar platform. However, you can do everything right and have what is seemingly the perfect merger, but you’re still going to face some post-merger challenges, including the following:
- Momentum: One of the primary challenges organizations face after M&A is the ability to maintain momentum. Even when carefully addressing the integration issues, it’s common to overlook the day-to-day operations. While integrating, it also has to be business as usual. You’ll need to set a range of KPIs to overcome this particular challenge. Doing so will allow you to determine quickly whether the business or the integration process has fallen behind.
- Getting Employees on Board: Each list of integration problems in M&As starts with the human aspect. Engaging your employees in the integration process is a unique post-merger challenge. In rare cases, organizations are lucky when these HR issues only double. In most cases, they multiply, meaning you need a plan in place to combat the avalanche. The most efficient means of overcoming this is to implement what is known as a change management program. This will allow you to overcome culture clashes and people issues and build the best company possible. Since the value of an M&A is significant, you must find means of tackling these expected issues head-on.
- Senior Management Challenges: It doesn’t matter if you’re early in your career or a seasoned vet – no one is immune from the challenges stemming from M&As. However, a significant problem that can occur is a manager not getting up to speed in their new role. If this happens, other post-integration challenges will snowball.
- Changes in Culture: If you’ve been with a company for many years, you all have a way of conducting your business. When you bring another organization in with all the power, things are going to change. The only way to avoid this is through communication.
- Communication Problems: It’s easy to say – communicate, and things will get better! Well, it’s not always that simple, but good communication is the difference between a smooth integration or one that hinders progress. If your team doesn’t know what’s going on, they’re not going to engage with the integration – not by choice, but because they can’t. Communicating and keeping everyone in the loop will make this transition smooth.
MSP Future After M&A
If you’re considering M&A or you’re in the process, you know the challenges that lie ahead. A vast majority of M&As fail. However, knowing the pitfalls and valleys ahead and the methods of overcoming these gives you a leg up on the competition. Successfully implemented M&As are invaluable and bring a lot to both organizations.
This is one part of our series on M&As. If you’d like to learn more, read our white paper, Service Provider Roll-Up Strategies: Accelerating M&A with an Agnostic UC Platform.