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Channel Digest: M&A shows no signs of slowing down

This month's Channel Digest explores three UK channel acquisitions driving growth and consolidation, while raising critical concerns about market diversity and competition.

The UK channel experienced a whirlwind period last month, with mergers and acquisitions (M&A) continuing to reshape the landscape in ways that defy any earlier predictions of a slowdown. Although the managed services industry is familiar with M&A, it has never been more primed for investment. Despite navigating a global pandemic, a recession, and labour shortages, the relentless drive for growth and consolidation is showing no signs of stopping. This dynamic environment sets the stage for a closer look at recent acquisitions.

Take, for instance, Peterborough-based Managed Services Provider (MSP) Rydal Group. The firm’s strategic acquisition of Cambridge-based My Communications is a prime example of this trend. By integrating My Communications' expertise in phone systems connectivity and mobile services, Rydal Group has significantly bolstered its telecom services. This move not only expands their client base to over 2,500 but also boosts its annual turnover to over £11 million. This local example is mirrored by activity in other regions.

In Scotland, MSP Workflo Solutions' acquisition of fellow Scottish MSP MacD IT showcases the push towards regional consolidation. This deal aims to provide more comprehensive service solutions by combining regional expertise. Further afield, Nordic MSP Advania's acquisition of UK-based VAR Servium underscores the importance of geographic expansion and service enhancement. This acquisition not only enhances Advania's UK coverage but also strengthens its vendor and distributor relationships.

These acquisitions reflect the wider market trends reported by global tech investment bank Drake Star, which indicate a significant uptick in M&A activity within the MSP sector. Specifically, there was a 54% rise in Q4 of 2023 compared to the previous quarter. Companies are fervently driving this surge, aiming to expand their service offerings and client bases.

Driving factors: Why MSPs opt for M&A?

MSPs consider M&A for several reasons. Firstly, most midsized enterprises now have established IT solutions providers (ITSPs) delivering a significant number of services, making it difficult to replace them. Consequently, there are fewer new potential clients in the market, increasing the difficulty and cost of winning new clients. Acquiring another company with a recurring revenue client base is often cheaper than organic growth.

Secondly, staffing challenges make organic growth through recruitment difficult. Acquiring an MSP that specialises in desired services can be a faster route to achieving goals compared to hiring new talent and building services internally. Buying a cohesive team is potentially easier, although many acquisitions will merge administrative, HR, and marketing functions to achieve cost savings.

Lastly, market saturation and increased competition prompt MSPs to consider M&A strategies. While M&A traditionally involves risk, the increasing difficulty of differentiation and rising customer acquisition costs make taking on that risk more acceptable. Despite the inherent risks, this strategic approach is becoming more appealing, especially considering the lucrative potential of the MSP sector highlighted within The Drake Star report.

The survey underscores that the global managed service market, which was valued at $283 billion at the end of 2023, is anticipated to soar to $552 billion by 2032. This growth is driven by the escalating complexities of IT and the rising demand for cost-efficient managed services.

M&A challenges: Market diversity and competition

However, amid this fervour of growth and consolidation, there are critical challenges that the industry must confront. While these three strategic acquisitions (Rydal Group, Workflo, and Advania) demonstrate that these firms are willing to do whatever is necessary to enhance service delivery and expand capabilities, they also raise concerns about market diversity and competition.

As larger MSPs continue to grow through strategic acquisitions, smaller players face an uphill battle to stay competitive. This could lead to monopolistic tendencies that stifle innovation and market diversity. The challenge for the MSP industry will be to balance the benefits of strategic growth with the need to maintain a competitive and innovative market environment. Ensuring that smaller MSPs can thrive alongside larger entities will be crucial for fostering a dynamic and diverse  market that continues to deliver innovative solutions and exceptional service to clients

Diversity in the market, with both smaller and larger MSPs, is highly beneficial. It drives innovation as varied businesses introduce unique perspectives and solutions. Smaller MSPs can quickly adapt to new technologies and trends, fuelling rapid advancements. This diversity ensures clients have access to a wide range of tailored services, enhancing overall service quality and encouraging continuous improvement. Moreover, a market with varied players promotes resilience, reducing dependency on a few large entities. Ultimately, this diversity fosters a dynamic competitive environment that delivers exceptional innovative solutions, meeting the diverse needs of clients and contributing to a robust, thriving industry.

Yet, there's another perspective worth considering. The consolidation wave could also be seen as a necessary evolution driving the industry towards greater efficiency and stronger service standards. Smaller MSPs struggling to compete might view this consolidation not as a threat but as an opportunity.

By joining forces with larger, more established entities, they can leverage greater resources, advanced technologies, and wider market reach that would otherwise be unattainable. This perspective suggests that consolidation could lead to a more robust, resilient industry overall, where the collective strength of fewer, but stronger, players drive innovation from a position of stability and security.

However, several factors can hinder smaller or midsized MSPs from joining forces with larger entities. Firstly, cultural differences can lead to integration challenges, disrupting operations and employee morale. Secondly, the cost and complexity of merging can be prohibitive, especially for smaller firms with limited financial resources. Thirdly, smaller MSPs may fear losing their autonomy and flexibility—key advantages often emphasised by boxxe CEO Phil Doye in our forthcoming High Growth 100: Mergers, Acquisitions, and Investment report. Additionally, navigating legal and regulatory requirements during mergers can be daunting. Lastly, there may be a misalignment of strategic goals, making it difficult to find a compatible partner. These factors can collectively discourage smaller MSPs from pursuing mergers with larger companies.

Looking ahead: The future of the industry

Despite these challenges, the managed services industry, like many other many other heavily consolidated sectors like the semiconductor, health care services and media industries, remains fiercely competitive, with every business facing significant hurdles.

Companies in the MSP sector has elevated their standards to align with today’s uncertain economic backdrop, labour shortage, and political climate. As deals persist, firms will need to decide whether to acquire or be acquired by larger firms to survive. This decision will shape the future landscape of the industry, determining whether it remains diverse and competitive or becomes more consolidated and standardised.