How can MSPs develop an M&A advantage?

Investment director of mid-market private equity firm ECI Partners, Daniel Bailey, on how MSPs can stand out in a competitive M&A market

The increasing need for companies to have digital, scalable, and secure IT estates means that the managed service providers (MSPs) market continues to be an attractive space for private equity investment. This also makes it a competitive M&A environment, with MSPs competing with other trade acquirers and private equity firms alike.

This is especially true for target acquisitions with scale or in niche high growth areas - companies with cyber security or public cloud skills being good examples of the latter. As the MSP buy-and-build market matures, with more competition and higher prices, what steps can MSPs take to set themselves up to win?

M&A strategy

A great aspect of consolidation in the MSP space is that there is fairly open information about companies in the market. Megabuyte and Companies House for example, provide data sources that can be used to create a good market map of acquisition targets.

Lots of data is a good thing, however, it's also a large market and successful M&A usually requires focus and conviction. Therefore, the best way to ensure that time and effort are being used wisely is to develop a crystal-clear strategy. If there is clarity over where an MSP wants to be in five years' time, the skills or services they need to develop through M&A or organic investment can be determined and provide an MSP with the focus and conviction they need to shortlist and prioritise targets more easily.

An important point to bear in mind here is that M&A strategies tend to be more successful if they are customer led - i.e. buying in capabilities that existing and prospective customers want. A good example of this is Content+Cloud, which shortly after ECI's investment, developed a strategy to become the UK's leading Microsoft partner, offering their customers services across Microsoft's three cloud ecosystem. That strategy gave the business real clarity as to what it needed to acquire and the ability to articulate a clear vision to the vendors as to how they would fit in with this journey. Vendors were attracted to this transparency.

Resourcing M&A

M&A takes up a lot of time - whether it is building relationships with corporate finance advisors, finding and meeting businesses, or executing a transaction.

A private equity partner can help support a management team by providing horsepower throughout the M&A process, from developing strategies to execution to integration planning.

An MSP looking to carry out several M&A transactions may consider recruiting resource in-house. Having someone internally responsible for M&A can provide real focus and pace to the MSP's acquisition strategy and mean that the buy-and-build approach becomes less opportunistic and more strategic.

Understanding pricing

Sometimes deals might seem too expensive or not quite the perfect strategic fit, so a healthy dose of pragmatism is key. M&A is often about compromise and finding a route through to a deal that works for all involved - vendors, acquirers, and management teams. To have the best chance of agreeing a deal, it's important that acquirers listen carefully to vendors to gain a better understanding of their ambitions and of the value the acquisition would bring.

It is also important for acquirers to have sight of other deals in the sector so that an attractive deal can be put forward. This is particularly true in sectors where pricing is inflationary, as is the case in the IT managed services market. Pricing for acquisitions has gone up significantly in the last five years - so understanding the strategic attractiveness of the deal, what a vendor wants, the scarcity of the business and some knowledge of other M&A activity in the sector, will help MSPs to pay up for the right deals.

A clear integration plan

MSPs that have been through an acquisition will have already learned many important lessons around back office and customer-facing integrations - for example, moving the business to a singular back office can significantly increase scalability and efficiency. Meanwhile, those with a customer-first M&A strategy will find it easier to deliver front-end integration, as they will have already considered how they might be able to cross-sell products or services.

Brand strategy also presents an interesting set of options for acquirers. It is common for companies to move acquisitions under one brand, but this is not always the best approach. For example, MSPs often maintain a different brand for their cyber security services, so that it is distinct to the MSP's core offering, which it may be testing. In an alternative scenario, an acquisition may have brand equity that is valuable to retain. The main thing is having a brand strategy rather than being a blind brand accumulator - and bearing this in mind throughout the M&A process.

M&A activity continues to gather pace within the MSP sector, with competition for the best deals also continuing to heat up. MSPs that have taken the time to carefully plan and prepare their M&A strategy are more likely to be on the right footing to make the acquisitions that will help them achieve their growth plans - both in the near and long term.

Daniel Bailey is investment director at mid-market private equity firm ECI Partners