MSPs Can't Escape M&A

Making their way through the midmarket, buyers are heading “downstream” to smaller managed service providers. By Sandra Gittlen

The managed service provider field is so active these days, it resembles a schoolyard game of kickball. Larger MSPs, telecom companies, private equity firms, venture capitalists, and others are busy sizing up which regional MSPs they want on their team. And for anyone who thinks the shrinkage is nearly over, industry insiders predict this process still has several years to go.

“We are definitely at the beginning stages of MSP consolidation. With tens of thousands of sub-$5 million providers still available, market [stabilization] will take a few years,” says Craig Guice, CEO of outsourceIT, which has offices in Washington, D.C., and four other locations. A more than $20 million MSP, outsourceIT has been on its own spending spree, snapping up almost a half-dozen regional providers in the past few years.

Mike Harvath, president and CEO of Bloomington, Minn.-based Revenue Rocket Consulting Group, agrees that the merger and acquisition activity is just getting started. “There is a serious land grab going on, with very creative deals taking place,” says Harvath, a growth counselor and M&A adviser for IT services firms.

“We are definitely at the beginning stages of MSP consolidation. With tens of thousands of sub-$5 million providers still available, market [stabilization] will take a few years.” Craig Guice, CEO, outsourceIT

Best Buy MSP subsidiary mindSHIFT, Konica Minolta's All Covered MSP division, and venture capital firm Technology Capital Investors (TCI) are among the notable shoppers trying to expand their IT services repertoire.

For instance, mindSHIFT in June acquired White Glove Technologies to break into the Texas market. All Covered in August snatched up healthcare MSP WaveTwo, and TCI in February picked up security-focused MSP Savid Technologies.

Guice, whose company recently merged with cloud service provider GoBeyondIT, observes that M&A interest lies in three distinct categories: the access the MSP provides to an attractive region or customer base, the talent within the MSP, or the proprietary technology it holds.

M&A - THE ONLY WAY

With the rapid pace of the market, Guice says MSPs are being led straight into M&As. OutsourceIT, which has been around since 2004, attempted to grow organically but soon realized that a “natural” pace wasn't fast enough. “It would have taken a long time to get to the size and scale we needed to compete,” he says.

In addition to MSPs that are trying to build out their businesses, the market is flooded with “outsiders” such as private equity firms that want to expand their portfolios with cloud computing plays like managed services.

“Managed service providers have always been highly labor-intensive and as such, difficult to scale. Cloud computing is changing that and the fundamental nature of what an MSP does,” says Sam Attias, managing partner and founder of TCI, headquartered in New York. “MSPs have to move from being solutions providers to being the ones that unify the IT needs of a business. They have to become the aggregator.” Altering this strategy will not only enable MSPs to grab more customers in their region, but also broaden their expertise into other services and locales.

The business model isn't the only thing evolving; client attitudes are as well. Companies are open to the centralization and standardization of services that cloud promotes in exchange for lower prices and faster turnaround times, according to Attias. “What they're seeing is that cloud enables them to quickly and cost effectively scale IT,” he says.

The telcos, ISPs, data center hosts, and other peripheral players also see the value in acquiring small to midsize MSPs. Adding MSP technology enables them to sell more services to an established customer base. For instance, Earthlink last year bought a managed services suite from Synergy Global Solutions to kick-start its MSP revenue stream.