When it comes to business and all other facets of life, success is always the primary objective. The underlying technology that service providers offer matters more than ever today, and the UC platform their organization offers is a vital component of their M&A strategy. If you’re a CEO looking to boost corporate performance or serve as a jump-starter for long-term growth, acquiring another company may seemingly be the answer to all of your questions. According to Harvard Business Review, companies spend more than two trillion dollars on acquisitions yearly.
In our M&A series of blogs, we’ve mentioned this statistic several times, which is worth noting, especially when discussing success – the failure rate of M&As is somewhere between 70 to 90 percent. Researchers have attempted to explain these statistics by analyzing deals that worked and those that didn’t. However, one theory HBR proposes is that acquisitions fall short of expectations because executives fail to distinguish the deal’s strategic purpose, which can dramatically alter its growth prospects.
MSP M&A activity remains strong through 2022, and ChannelE2E tracked more than 86 technology mergers and acquisitions, with 513 buyouts through the end of May. Roughly 110 of these deals, equating to 21 percent, leaned heavily upon MSPs. An estimated 153 M&A deals involved private equity firms, translating to 30 percent of the transactions.
Prior to the pandemic, buyers were mostly looking for MSPs bringing in ten million dollars in revenue, but as the pandemic hit, buyers were looking to purchase MSPs of all sizes. With the pandemic in our rear view, private equity (PE) firms and larger MSPs are flushed with cash and ready to make a move. Smaller MSPs are more willing to sell – MSPs as small as five million want to grow through acquisition, buying, or merging with smaller peers.
M&As are driven by various factors – some of these include increasing scale, entering new markets, reducing competition, new technology, new services, and much more. Mergers and acquisitions are alive and well, but what is the central component of MSP M&A success?
Factors that Influence MSP M&A Success
If Harvard Business Review’s calculations are correct and only ten to 30 percent of M&As will succeed, it begs the question – how do MSPs maximize their chance of success? Mergers and acquisitions are among the most challenging strategies organizations can undertake. Although it’s a significant risk, the rewards will pay dividends in the end for those who succeed. However, the staggering rate of failure and severe financial consequences are enough to leave you wondering – what are some factors that influence MSP M&A’s success?
Service providers that adopt a vendor-agnostic approach can acquire more businesses at a lower price point. Doing so can simplify the integration and rapidly bring in new customers under centralized control. Instead of specializing in a single flavor of unified communications, service providers can clone the characteristics, capabilities, and user experience so that users and customers are unaware of the changes in their UC services. What does this mean? It enables the organization to bring them into a UC platform that’s no different than their existing system, thus reducing issues since the customer won’t have to change their behavior.
A vendor-agnostic platform enables the service provider to absorb an acquired business faster and with less end-user disruption, which, in turn, delivers more significant returns. Since vendor-agnostic platforms don’t care what they absorb, it’s agnostic. After all, the choice of acquisition target will have a more negligible impact. This will broaden the scope of acquisition targets, and by extension, the more choice a business has in what targets to acquire, the less it will pay as a consequence.
Cloning existing services can go as deep as the end-user level. In some cases, the end-user may not even need to update their voicemail message. The migration for a customer could also be as simple as receiving an invoice from a new address. The only noticeable change for them, which is hugely beneficial, is that their features and capabilities will grow. It provides customers with a value-add and promotes positive relationships with new suppliers.
Another option for service providers is to centralize control when their new customers migrate to their existing platform. What does this do? Well, the customers won’t have to duplicate their ticketing and support, billing systems, or any other back-office processes. It allows them to gain clarity into all their customers on one platform, reducing the complexity and resources necessary to manage a growing customer base.
Vendor-agnostic platforms enable you to offer unique pricing models that differentiate your services. One example of this is instead of selling seats, you can offer session licenses that cater to the growing hybrid, remote, and mobile workforces. Billing is tied to active calls instead of desk phones and allows for working from anywhere. Session-based pricing translates to price efficiency over time as the volume of calls increases.
The business model that enables more control over end-user pricing is what’s known as concurrency, which is different from being vendor-agnostic. Vendor-agnostic is about simple integration with other vendors and being able to clone services as close to the original as possible and minimizing disruptions and making migrations simple for end-users.
While features have been at the forefront of competition in the past, today, it’s all about flexibility. Service providers must shape solutions and experiences for the ever-changing customer behavior. Fortunately, with the right platform in place, they can make this a reality, and M&A becomes simple.
Micheal Quin, the founding partner of Q Advisors, had something to say about it “some of the most important things the financial community is looking for is growth in annual recurring revenue or monthly recurring revenue and a churn rate below 1% per month. Another one is how many products and services your clients are taking from you, the more the better because that helps combat churn and makes for more customer stickiness. This is about how much more wallet share they can get and if they are serving mid- size or larger customers, where there are opportunities to upsell. They will also look at what the service provider’s technology stack is like and if it will integrate well with acquisition targets. People don’t like when companies are running multiple technology stacks.”
NetSapiens limits churn by helping service providers’ customer bases to consolidate with minimal disruption. We help service providers increase the annual recurring revenue by bringing customer bases under centralized control and releasing higher value service functions and services to larger audiences at scale, which generates monetization events as a consequence.
As the MSP market continues to evolve, and the way in which M&As succeed is shifting, it’s important to stay up-to-date with the latest trends. If you’re interested in learning more, make sure to check out our white paper, Service Provider Roll-Up Strategies: Accelerating M&A with an Agnostic UC Platform.