MSPs – Weathering the COVID-19 Storm and Positioned for Growth

According to two recent industry surveys, the managed service provider (MSP) industry is holding up better than most during the pandemic-induced economic slowdown, and MSPs are well positioned for growth in the coming years. ITGlue and Datto surveyed thousands of MSPs before and after the onset of the COVID-19 pandemic. The findings from the surveys were similar and reflect the strength and resiliency of the MSP industry:

MSPs experienced solid growth prior to the pandemic.
According to Datto, nearly 80% of MSPs experienced average annual revenue growth of 5% or more over the past three years and approximately 20% of MSPs reported growth of more than 20% per year, on average.

Among ITGlue survey participants, the top third of MSPs had revenue growth and net margins over 20%.

MSPs have been impacted by the slowdown but are likely performing better than other segments of the economy.
Responses to Datto’s post-pandemic survey showed MSPs still expect to grow in 2020 but at a much slower pace than they originally forecasted. As expected, most respondents said they expect to reduce their growth plan following the onset of the pandemic, however, 11% said they are revising their growth projections upward as they expect to beat their original pre-pandemic plan.

ITGlue found that approximately half of MSPs saw their monthly revenue decrease in April as the result of the coronavirus shut down, though some MSPs reported an increase in revenue. In addition, ITGlue found responses about economic outlook didn’t change much between the pre- and post-pandemic surveys, with approximately 85% of respondents being neutral to bullish on the MSP market’s ability to recover from the pandemic. ITGlue concluded “this lack of change would seem to reflect a view of the pandemic as a short-lived economic phenomenon, one that would come with a V-shaped recovery, rather than a slower return to normal economic activity.”

Despite current turmoil, growth opportunities exist for MSPs
Although the COVID-19 pandemic has created a challenging environment for MSPs, it has also produced new opportunities. Many MSPs are observing an acceleration of cloud mitigation projects and greater demand for security, continuity, and compliance services.

Other areas expected to drive revenue in 2020 include improvement of remote access solutions, VoIP, Azure migrations, business resilience solutions, and hardware sales.

Interest in M&A waned a bit but remains strong
Prior to the pandemic, ITGlue found just over half of MSPs were either interested in acquiring or merging with another MSP (the question measured interest from both potential buyers and sellers). In the follow-up survey, interest in M&A diminished a bit but remained strong. Over 1/3 of respondents remained interested in M&A with 13% indicating an active interest (down from 17%), and an additional 24% responding they are open to an opportunity (down from 35%).

When only looking at potential sellers, ITGlue’s survey found seller interest was also somewhat diminished compared to pre-pandemic levels. The results showed MSPs that are actively considering a sale decreased from 6% to 4% of respondents, and those that are open to an opportunity decreased from 21% to 11%.

The decreased interest in M&A among MSPs is not surprising and is likely due to the high level of uncertainty caused by the onset of the pandemic. MHT expects interest in M&A among MSPs will rebound to pre-pandemic levels as the economy starts to recover and MSPs adjust to new market conditions.
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It’s too early to tell what lasting impact the pandemic will have on the MSP industry, but the surveys indicate the MSP industry seems to be doing well in comparison to most other industries, with good growth opportunities in front of them.

MHT Partners, a leading technology investment bank, believes MSPs that continue to perform well in the current environment will draw a lot of attention in the M&A market. Both financial and strategic buyers are flush with cash and looking for acquisitions, particularly those involving resilient businesses serving attractive markets.

If you would like to learn more about MHT and our Technology practice, please contact Kevin Jolley (kjolley@mhtpartners.com) or Mike McGill (mmcgill@mhtpartners.com).

Sources:
Datto’s Global State of the MSP Report (https://www.datto.com/resources/dattos-global-state-of-the-msp-report-na)
ITGlue’s 2020 Global MSP Benchmark Report (https://www.itglue.com/resource/global-benchmark-2020/)

COVID-19 & IT Services: Cyber Security & Cloud Expertise are Paramount

The COVID-19 pandemic is causing a huge spike in the number of at-home workers. Estimates show that two thirds of the U.S. workforce now work remotely, and this number is expected to remain steady through April and potentially May.(1) In turn, this has put extreme pressure on internet bandwidth. During the month of March, global internet traffic increased by 30% while normalized monthly growth was expected to be about 3%.(2) Yet companies are being forced to slash IT spending because of the growing economic uncertainties as a result of the pandemic. The combination of a larger remote workforce, increased internet traffic, and shrinking IT budgets has presented cyber criminals with an ideal environment for wreaking havoc.

Cyber attacks have exponentially increased since the onset of the pandemic, largely due to the transition to a distributed workforce. As employees bring corporate devices onto unsecured networks and unsecured devices onto corporate networks, they provide cyber criminals with a variety of potential entry points into a company’s network infrastructure, such as remote desktop protocols (“RDPs”). A recent analysis by Reposify indicates an increase of 127% in exposed RDPs since the start of the pandemic.(3) Targeted attacks have appeared in many forms. As of March 26, the number of coronavirus–related phishing attacks rose 667% compared to the prior month.(4) Cyber criminals attempt to gain access to employee credentials or other sensitive information through clickbait that tempts the employee to follow a link for more information. Another commonly used method for cyber-attacks has been the creation of fake COVID-19 informational websites. Over 100,000 domains have been created since the start of the crisis, many of which are aimed at preying on people who desire real-time updates on the pandemic.(5)

Despite a short-term IT spending spree required to enable working remotely and defend against cyber attacks, companies are expected to pull back on overall IT spending as a cost-cutting measure to combat the economic slowdown resulting from the pandemic. Forrester has revised its forecast of 2020 IT spending to be down nearly 10% between March and April alone.(6) While providers of IT products will be hit hardest, IT managed service providers (“MSPs”) that are particularly well equipped to enable remote workforces and provide cyber-security solutions are expected to fare better than other industry participants during the downturn. The necessity of increased investments and the need for third-party assistance to build and secure remote work capabilities were quickly realized once the nation was ordered to work from home. In a recent survey of channel companies conducted by CompTIA, approximately 75% of the firms reported an increase in business opportunities since the onset of the pandemic, primarily due to the shift from on-premise infrastructure to cloud-based infrastructure and the need for enhanced cyber-security solutions.(7)

Moving forward, although overall IT spending will be down for a period of time, MHT Partners expects pure-play MSPs and IT services companies with significant revenue derived from cloud and security expertise will continue to be sought-after acquisition targets, as these firms will fare better in the downturn and be in the best position for accelerated growth as the economy recovers.

MHT Partners, a leading technology investment bank, welcomes the opportunity to discuss how the IT services market will continue to evolve in a post-pandemic world. Please contact Kevin Jolley (kjolley@mhtpartners.com) or Mike McGill (mmcgill@mhtpartners.com) to start a conversation.

(1) https://www.netskope.com/blog/remote-work-increasing-exponentially-due-to-covid-19
(2) https://www.infosecurity-magazine.com/news/internet-spiked-double/
(3) https://www.us-cert.gov/ncas/alerts/aa20-099a
(4) https://pitchbook.com/news/articles/privitar-lands-80m-as-cybersecurity-interest-grows-amid-covid-19
(5) https://www.weforum.org/agenda/2020/03/covid-19-cyberattacks-working-from-home/
(6) https://www.wsj.com/articles/it-spending-forecasts-take-a-hit-as-coronavirus-slams-global-markets-11583963714?mod=article_inline
(7) https://www.comptia.org/blog/tech-business-covid-19

How Does COVID-19 and a Remote Workforce Impact the Future of Employee Engagement?

Many people claimed that 2020 would be the year of the distributed workforce. In the wake of unprecedented events in modern history, even the most optimistic believers could not have anticipated that the majority of the country would be currently working remotely. With COVID-19 rapidly spreading across the nation, leaders in the public and private sectors have been left with no choice but to require employees work from home. Prior to the crisis, a mere 3.6% of the U.S. workforce worked at home half or more of the time. Preliminary estimates show that as a result of COVID-19, anywhere from 25-30% of the U.S. workforce will continue to work remotely at least half of the time(1). What was once purely a social experiment, a distributed workforce may now be the reality for a number of Americans.

A typical employer can save approximately $11,000 per year for each person that works remotely half of the time(1). Thanks to workflow and communication tools offered by providers such as Microsoft(2) and Zoom(3), employers have quickly harnessed the power of technology in the transition to and adoption of a remote work environment for enhanced productivity. As the distributed workforce becomes more broadly utilized, the nation’s employers, particularly small- and medium-sized businesses (“SMBs”), will also need to maintain strong employee engagement and recognition programs to continue fueling productivity. For this reason, MHT believes that employee engagement and recognition providers will see increasing demand for the design, implementation, and management of tech-enabled solutions that ensure employees remain connected to both the social and productivity aspects of working in a remote environment.

Research has shown that companies that successfully engage employees achieve earnings-per-share growth that is more than 4x their peers(4). The social aspect and comradery of the workplace is important to employees and is one of the main drivers of producing meaningful work. However, establishing engagement and recognition programs for a distributed workforce presents materially different challenges than an in-person program. Managers might not know how to organize and lead a remote workforce, employees may be less recognized for work done remotely, and it may be more difficult to accurately assess the productivity and overall sentiment of a distributed workforce.

Similar to outsourcing workflow and communication needs, SMBs can outsource all engagement and recognition needs to tech-enabled providers instead of spending unnecessary time and money on developing a program internally. Providers such as ITA Group(5) and Workstride(6) offer a suite of cloud-based software solutions, including the design and implementation of a virtual community through social communication channels directed at engaging employees in a non-work environment. Additionally, the providers offer a platform for peer-to-peer employee recognition and a website to redeem rewards from the recognition earned. Even more compelling, the providers offer analytical platforms and reporting dashboards that track workforce mood and engagement through pulse surveys, crowdsourced data, and company assessments. Taken together, employee engagement and recognition providers offer a unified, holistic set of solutions to managing engagement and recognition for a remote workforce.

MHT welcomes the opportunity to discuss how the influx of demand for distributed workforce solutions will continue to draw investment interest from strategic and financial parties for employee engagement and recognition providers. Please contact Mike McGill (mmcgill@mhtpartners.com) or Kevin Jolley (kjolley@mhtpartners.com) for more information.

(1) https://globalworkplaceanalytics.com/work-at-home-after-covid-19-our-forecast
(2) https://www.microsoft.com/en-us/
(3) https://zoom.us/
(4) Source: https://news.gallup.com/poll/241649/employee-engagement-rise.aspx
(5) https://www.itagroup.com/
(6) https://www.workstride.com/

Consumer Purchasing Metamorphosis: How Consumer Purchasing Data is Shaping Loyalty Solutions

Today’s businesses face increasingly competitive dynamics in brand loyalty as consumer preferences become more demanding and less forgiving. Companies traditionally relied on a one-size-fits-all approach to attracting and retaining loyal customers. However, businesses are now adopting a personalized, targeted, and multi-channel approach throughout the entire consumer lifecycle. Payment platforms, in combination with tech-enabled engagement and marketing solutions, continue to emerge as a more attractive option to create experiential success for consumers through the use of artificial intelligence (“AI”), machine learning, and data analytics, which has driven M&A interest and activity in the space.

Harvard Business Review’s, ‘The Value of Keeping the Right Customers,’ illustrates how increasing customer retention by 5% increases profits from 25% to 95%(1). The question is, what is the best way to incent consumer loyalty? Companies historically targeted repeat customers through a standardized marketing program. Consumers received mass-produced marketing material and participated in transactional rewards programs that offered little in terms of customization. While this approach has been successful in the past, brands have begun developing a more personalized, experiential approach to consumer loyalty. The use of tech-enabled engagement and marketing solutions in the rewards space has allowed companies to identify consumer trends at an individual level and build on consumer loyalty. Data analytics, in combination with AI and machine learning, allow companies to thoroughly analyze each consumer transaction and predict relevant product recommendations. Engagement and marketing platforms use consumer data to calculate metrics such as recency, frequency, and spend of each customer in addition to projected churn rate and customer lifetime value. This allows companies to understand what is driving behavior at the individual level and use successful engagements as a basis for increasing consumer loyalty. But where is this consumer data coming from?

Data gathered from a consumer’s purchases offers brands the opportunity to obtain deep insight into that customer’s habits and trends. The data captured through the payment process allows marketers to develop unique, individualized actions aimed at improving customer relationships and maximizing the potential of future interactions. Mastercard has been an early adopter of utilizing its payment data in conjunction with tech-enabled loyalty solutions to offer data-driven insights to retailers and other consumer brands. Mastercard has made a number of investments in the space to enhance its solutions’ offerings, from its acquisition of Applied Predictive Technologies, a test and learn analytics tool for brand loyalty, to its recent acquisition in October 2019 of SessionM, a SaaS platform for customer engagement and marketing.(2)   Information gathered from the payment process lays the framework for tech-enabled engagement and marketing companies to deliver advanced insight into consumer spending and personalized solutions for consumer loyalty.

In addition to facilitating an individualized experience for consumers, the combination of payment and tech-enabled engagement and marketing platforms helps to curate the unique experience across multiple facets of the product purchase cycle. Companies with strong omnichannel customer engagement strategies retain 89% of existing customers, as opposed to a 33% retention rate for companies failing to embrace these strategies(3).  Payment platforms provide another channel of insight into consumer loyalty by analyzing purchasing habits and using the data collected to deploy targeted interactions that incentivize consumers at various stages in the sales process. The acquisition of Honey by PayPal for $4 billion in November 2019 illustrates continued investment by payment platforms in omnichannel engagement and marketing solutions(4). Instead of solely targeting customers during checkout, PayPal will now leverage Honey’s product discovery, price tracking, offers and loyalty solutions to interact with consumers across multiple touch points and earlier in the deal discovery process.

MHT, a leading technology investment bank, will continue to follow consumer loyalty trends as investment in engagement and marketing software remains an increasingly beneficial option for companies looking to maintain high growth and expand into new services. To learn more about MHT, please contact Mike McGill (mmcgill@mhtpartners.com) or Kevin Jolley (kjolley@mhtpartners.com).

(1) https://hbr.org/2014/10/the-value-of-keeping-the-right-customers
(2) https://newsroom.mastercard.com/press-releases/mastercard-acquires-sessionm-to-broaden-its-merchant-loyalty-marketing-services/
(3) https://www.digitalcommerce360.com/2013/12/31/why-omnichannel-strategy-matters/
(4) https://investor.paypal-corp.com/news-releases/news-release-details/paypal-acquire-honey

Private Equity’s Appetite for IT Services Firms Remains Ravenous

Private equity firms continue to actively invest in the IT Services sector. IT Services companies remain attractive investment targets for a variety of reasons, including:

  • The information technology market is huge and experiencing secular growth;
  • The complexity of technology solutions continues to increase, driving demand for outsourced services;
  • The IT Services market is highly fragmented, which provides an opportunity for growth through acquisition;
  • IT Services businesses benefit from economies of scale as personnel utilization improves, purchasing power increases and fixed costs are used more efficiently in larger businesses; and
  • Customer relationships often involve providing managed services, which result in improved visibility into future financial performance.

These attractive attributes provide private equity firms with the opportunity to build large, profitable enterprises that generate significant returns on investment.

Recent examples of capital being put to work in the sector include:

  • Trinity Hunt Partners, a private equity firm based in Dallas, announced the acquisition of a majority stake in Dataprise on January 6, 2020. Dataprise is an IT managed services provider offering IT management, IT strategy and consulting, information security solutions, help desk support services and cloud services.  Trinity Hunt stated they will support Dataprise as it grows through acquisitions to become a national managed services provider.
  • NetGain Technologies (NetGain), a managed services provider in the Central and Southeastern U.S, acquired Progressive Computer Systems, Inc., an IT services provider in North Carolina, on December 24, 2019. NetGain is part of Evergreen Services Group, which is a family of managed IT service providers and a portfolio company of Alpine Investors.
  • Logically, a provider of managed IT services to small and midsize organizations, acquired IQ Technology Solutions, Inc. (IQ) and Carolinas IT, Inc. (Carolinas IT) in December 2019. Logically is a portfolio company of Riverside Company, a global private equity firm focused on the smaller end of the middle market.  Carolinas IT is a provider of outsourced IT services to small- and medium-sized businesses in North Carolina.  The acquisition of Carolinas IT extends Logically’s East Coast footprint and adds audit and compliance services.  IQ is a provider of outsourced IT services to small- and medium-sized businesses based in Reno, Nevada. The acquisition of IQ expands Logically’s presence on the West Coast.
  • Coretelligent, a provider of comprehensive managed IT, security, and cloud services and a portfolio company of private equity firm VSS, acquired SoundView IT Solutions on November 19, 2019. SoundView is a full-service IT integration company with a focus on hedge funds, family offices, and corporations. The Soundview acquisition strengthens Coretelligent’s market position in the Financial Services sector.
  • Staple Street Capital acquired Cyberlink ASP Technology on November 6, 2019. Cyberlink is a managed IT services firm providing cloud, network, storage, managed application, desktop and security services to clients in a variety of industries.
  • Sentinel Capital Partners recapitalized New Era Technology on September 12, 2019. New Era provides managed services and systems integration capabilities for a wide range of IT solutions, including collaboration, data networking, and security. New Era historically has been an active acquirer, having completed 12 add-on acquisitions since its founding in 2013.
  • BC Partners, a London-based private equity firm, entered into a definitive agreement to acquire Presidio, Inc. (NasdaqGS:PSDO) on August 14, 2019. Presidio is an IT solutions provider delivering digital infrastructure, cloud and security solutions for commercial and public sector customers.

Other recent transactions involving private equity include Thrive (portfolio company of M/C Partners) acquiring EaseTech, VC3 (portfolio company of WestView Capital Partners) acquiring masterIT, and Ntiva (portfolio company of Southfield Capital) acquiring 3Points.

MHT Partners, a leading technology investment bank, believes companies offering differentiated IT services and technology solutions will be highly attractive targets in the current M&A market. Demand for acquisitions remains high as numerous private equity firms are looking to make initial investments in the sector and IT Services companies already owned by private equity firms will continue to look for add-on acquisitions.

To learn more about MHT Partners, please contact Mike McGill (mmcgill@mhtpartners.com) or Kevin Jolley (kjolley@mhtpartners.com).

The Expanding Technology Behind Channel Sales

If you’re a shopaholic, you’re probably a Nordy Club(1) member or hold a REDcard(2) from Target. If you can’t live without pumpkin spice lattes, you’re likely enrolled in the Starbucks Rewards program.(3) Many business-to-consumer (“B2C”) companies utilize marketing, loyalty, and rewards programs to engage consumers and drive brand recognition and customer retention. These programs were early adopters of technology and software aimed at delivering effectiveness, efficiency, and measurability to rewards and marketing spend. However, business-to-business-to-consumer (“B2B2C”) companies and channel marketers have been slower to adopt similar technology, until now.  B2B2C companies and channel marketers are beginning rapid adoption of technology and software to drive these types of measurable and repeatable results in their businesses.

Consider an HVAC equipment manufacturer: the manufacturer may choose to sell its products directly to consumers via a sales and installation team, partner with HVAC installation companies and outsource distribution, or use a combination of direct and indirect sales channels. On one hand, selling through a direct channel provides full control of the sales process. On the other hand, channel sales provides low sales, marketing, and distribution costs, and allows for expansion and scaling opportunities. Perhaps the biggest drawback to channel sales, however, is the lack of control over managing the sales process. Depending on the sales model, the manufacturer may have limited visibility into and influence upon the sales process. With 75% of world trade flowing indirectly, how do channel sales companies effectively incentivize and engage partners to achieve strategic sales initiatives?(4)

Channel loyalty technology and software provide a powerful answer to this challenge. Leading channel loyalty technology providers are enjoying rapid growth as they develop innovative solutions that help incentivize and reward partners in indirect sales channels. Traditional channel loyalty and rewards programs rely on commission opportunities as the sole force for driving strategic sales initiatives. New technology and software innovations like omni channel marketing, gamification, artificial intelligence (“AI”) and machine learning, and specialized partner relationship management (“PRM”) software are reshaping the loyalty landscape to provide personalized and experiential rewards programs for partners.

The average partner program contains over 90 distinct components.(5) Specialized PRM software helps string together partner planning, onboarding, enablement, incentives, marketing, and management. Channel, marketing, and sales professionals are realizing the importance of a strategic partnership with PRM software providers as it helps professionals influence the partner journey and manage a larger, more heterogenous portfolio of channel types. Further, channel loyalty technology providers are building omni channel marketing solutions and using AI and machine learning to help large businesses manage complex channel incentive programs in real time.

Some channel loyalty technology providers are using mergers and acquisitions (“M&A”) to broaden and expand service offerings to customers. For example, Zift Solutions secured a position in the PRM market in July 2017 after merging with Relayware, a PRM software provider.(6) The combination of Zift’s existing Channel-as-a-Service platform and Relayware’s PRM platform established an Enterprise Channel Management technology solution to expand functionality and return on investment (“ROI”) for customers. Another example is 360Insights’ recent acquisitions of Ohana Companies(7) in August 2019 and Marketing Technology Concepts(8) in January 2019. These acquisitions provide 360Insights with brand loyalty solutions and sales incentive management software to continue progressing toward an all-in-one solution. MHT Partners expects continued M&A activity in the channel incentive and rewards space as many players compete to become a dominant provider in the fragmented market.

MHT, a leading technology investment bank, will continue to follow channel loyalty trends as industry consolidation remains an increasingly beneficial option for companies looking to maintain high growth and expand into new services and geographies. To learn more about MHT, please contact Mike McGill (mmcgill@mhtpartners.com).

(1) https://shop.nordstrom.com/c/nordy-club
(2) https://www.target.com/redcard/about
(3) https://www.starbucks.com/rewards/
(4) https://go.forrester.com/blogs/partner-relationship-management-prm-comes-of-age/
(5) https://go.forrester.com/blogs/time-to-rethink-channel-incentives-and-program-management-cipm/
(6) https://ziftsolutions.com/whats-new/zift-relayware-to-merge/
(7) https://360insights.com/newsroom/pr/360insights-acquires-consumer-rebate-provider-ohana/
(8) https://360insights.com/newsroom/mtc-performance/

Additional resources:

https://blog.hubspot.com/sales/channel-sales
https://www.saleshacker.com/channel-sales-direct-sales-strategy/
https://go.forrester.com/blogs/partner-relationship-management-prm-comes-of-age/
https://ziftsolutions.com/whats-new/zift-relayware-finalize-merger/
https://go.forrester.com/blogs/time-to-rethink-channel-incentives-and-program-management-cipm/

Other transactions:

Impartner (PRM provider)_ acquired Amplifinity (develops and delivers referral programs)
Allbound receiving multiple rounds of venture capital funding (PRM software)

Sounding the Alarm – Cyberattacks Stoke the Flames of Red-Hot Managed Security Services

A cyberattack against Capital One, which was perpetrated by a single Seattle-based hacker in March, exposed the personal information of nearly 106 million of the bank’s customers and applicants. Capital One’s management didn’t become aware of the incident until it was reported to the company by an independent security researcher in July. Just ten days after the Capital One hack hit the airwaves, another cyberattack was announced in southern California. Computers belonging to the city of Los Angeles were breached in late July, providing the hacker with access to the personal information of 20,000 applicants for positions in the police department. As these examples show, no organization is safe from cyber criminals.

The ever-increasing threat posed by cyber criminals and a shortage of cybersecurity expertise has led to an increasing demand for managed security services (MSS). Simply put, MSS are network security services that have been outsourced to a service provider. Providers (MSSPs) typically offer round-the-clock monitoring and management of intrusion detection systems/firewalls, patch management, system upgrades, security assessments and/or audits, and emergency response services. Once treated as extraneous and handled in-house, network security services have morphed into a hot-button issue for businesses in recent years as cyber threats have increased in complexity, prevalence, and magnitude.

The MSS market is a large, growing, and evolving sector that has piqued the interest of both strategic acquirers and financial sponsors. According to a recent market research report published by Market Research Engine, the global MSS market is expected to grow at an average annual rate of 14.5% and exceed $58 billion by 2024. The industry-agnostic nature of cyberattacks, in conjunction with the growing, shifting threat landscape, is inspiring M&A activity, as private equity firms seek to invest in the fast-growing segment and strategic buyers look to close technology and expertise gaps, as well as benefit from the sector’s strong tailwinds.

Recent MSSP M&A transactions (as featured on PR Newswire) include the following:

  • In June, EisnerAmper announced CSAM Marketing, Inc. (d/b/a Computer Systems and Methods) joined EisnerAmper, with CSAM’s leadership team and IT engineers becoming part of EisnerAmper’s Process, Risk & Technology Solutions group. A key reason EisnerAmper acquired CSAM was to bolster its offering of cybersecurity services.
  • In May, Sunstone Partners announced acquisitions of Terra Verde Security LLC, TruShield Security Solutions, and Sword & Shield Enterprise Security to form one combined company, Avertium. Avertium is focused on supporting mid-to-large enterprises, making it one of the world’s largest managed security services providers for that market.
  • Also in May, Corsica Technologies announced its acquisition of EDTS Cyber, a provider of security services, and its sister company EDTS, an IT services provider. Corisca valued EDTS Cyber’s expertise, as the transaction expanded Corsica’s service offering.

MHT Partners, a leading technology investment bank, expects M&A activity involving MSSPs to continue at a robust rate. Factors supporting transaction activity include:

  • Fast-growing market – The fast-growing MSS market will continue to attract capital from both financial and strategic buyers, as strong growth will provide an opportunity to generate a significant return on investment.
  • Increasing complexity and shortage of skills – As cyber threats continue to increase in complexity, prevalence, and magnitude, the skills required to combat them continues to expand. Many managed services providers (MSPs) will acquire MSSPs to fill gaps in their skill base.
  • Speed to market – Managed security services are a critical offering for managed services providers. As such, many MSPs will look to acquire cybersecurity expertise rather than organically scale capabilities in order to increase speed to market to take advantage of the growing opportunity in the MSS market.

If you would like to learn more about MHT and our Technology practice, please contact Mike McGill (mmcgill@mhtpartners.com) or Kevin Jolley (kjolley@mhtpartners.com).

Loyalty in the Workplace

The old adage about the finance industry was “if you want loyalty on Wall St., get a dog.” That mentality has slowly crept onto Main St. as cultural norms have shifted, a strong job market has persisted, and the options for job seekers have exploded and are just a click away. The change in employee loyalty is reflected in the fact that, over the last 20 years, the number of companies people have worked for in the first five years out of college has nearly doubled. The days of slowly moving up the corporate ladder during a 40-year career are largely gone. These secular trends have led to the emergence of employers looking for ways to engage with, influence and retain employees to ensure longer-term, stable workforces, which ultimately drive value to organizations.

The change in employee loyalty is being driven by the new breed of millennial employees, many of whom are already well into their 30s. Understanding how to engage and retain millennials is now front and center for employers because millennials make up the biggest demographic in the workforce – more than one in three U.S. employees. As a result, the $5.8 billion market for employee incentive and recognition programs is expected to grow to $30 billion in the next 10 years.(1)

Growth in the employee incentive and recognition industry is further supported by the expectation that, within a decade, the millennial and Generation Z population will make up nearly 60 percent of U.S. workers. Studies have found that these new generations of workers are unlikely to feel engaged by traditional perks such as bonuses and employee-of-the-month awards. Instead, they are more likely to value policies that promote work-life flexibility, training in “soft” skills, and corporate social responsibility, one major study found.(2)

In order to address the issues caused by changing norms related to employee loyalty, numerous players have emerged to provide data-driven technology platforms to help employers engage with and retain employees. MHT Partners, a leading business services investment bank, has been following this trend closely and is actively involved in the loyalty and rewards sector broadly. We believe, as the issue of employee loyalty continues to expand, there will significant M&A activity involving innovative technology companies that provide unique solutions to improve employee engagement and retention.

(1) Future Market Insights
(2) 2018 Millennial Survey Report, Deloitte

IT Services Businesses . . . Making IT Happen

As digital technology continues to transform how business is done, the complexity and speed of change of information technology continues to increase dramatically. Many businesses realize it is impractical to invest in the required personnel and training needed to stay on top of the latest developments in technology. As a result, many companies, particularly small- and medium-sized businesses, rely on third-party service providers to install and manage their IT systems. The growing demand for these outsourced services has caught the attention of both strategic acquirers and private equity funds looking to capture share of a burgeoning global market, which is expected to grow at an average annual rate of 8.4% and reach $1.1 trillion by 2025.(1)

Supply and Demand for the M&A Market

Acquirer and investor demand for IT Services businesses remains high due to several factors:

  • The large, fragmented and expanding industry offers an opportunity to grow both organically and through acquisitions;
  • Demand for IT services is steadily increasing;
  • Recurring revenue generated by managed services’ contracts provides visibility into future performance; and
  • For strategic acquirers, consolidation provides an opportunity to expand technical and sales resources, access new customers and broaden service offerings.

In addition to being extremely large, the IT Services industry is highly fragmented with over 450,000 industry participants, which provides an ample supply of potential sellers for the M&A market. Industry fragmentation is expected to increase slightly as new participants regularly enter the market and often specialize in recently introduced technologies and emerging trends. However, the number of new entrants will be offset by large industry players continuing to acquire successful niche companies to add new capabilities and customers.

Key Value Drivers

Although both the supply of IT Services businesses and the demand from acquirers remains robust, not all sellers are created equal. Numerous attributes combine to determine how much a business is worth. For IT Services companies, several key value drivers are:

  • Recurring revenue – revenue derived from managed service contracts adds visibility to near-term financial performance. Sellers with a high percentage of recurring revenue will be considered more attractive than companies with solely project-based revenue.
  • Size and scale – companies that have achieved earnings before interest, taxes, depreciation and amortization (“EBITDA”) of at least $5 million will see significant interest from strategic acquirers and private equity firms, as companies of this scale are considered less risky than smaller firms.
  • Customer diversity – a highly diversified customer base helps mitigate risk due to potential customer losses.
  • Attractive financial profile – firms growing faster than the overall industry and those generating above average profit margins due to sustainable advantages will be considered highly attractive acquisition candidates.
  • Sector expertise – niche focused firms, especially those with focus on a fast-growing market segment, will receive significant interest from both financial and strategic acquirers.

Cybersecurity is Hot

As mentioned above, sector expertise can be a key differentiator for a potential seller. One area that is hot right now is cybersecurity. As the attention on cybersecurity continues to heighten, the focus on how IT solutions can mitigate the risk of a security breach will intensify. Recent cyberattacks at large, reputable companies like Equifax and Capital One have prompted businesses to take a proactive approach in evaluating the security of their IT infrastructure and systems. The acquisition of SLAIT Consulting by ePlus is one of many deals this year that involve a strategic investment in an IT Services provider offering managed security services. A few other security-related deals include Rook Security being acquired by Sophos, Nuspire acquiring GBprotect, and Corsica Technologies acquiring EDTS Cyber and EDTS.

Implications for future M&A

IT Services is a large, growing market that will continue to attract investors and acquirers. MHT Partners, a leading technology investment bank, believes companies offering differentiated IT services and technology solutions will be highly attractive in the M&A market. If you would like to learn more, please contact Mike McGill (mmcgill@mhtpartners.com) or Kevin Jolley (kjolley@mhtpartners.com).

(1) https://www.grandviewresearch.com/press-release/global-it-professional-services-market

Tech-enabled Innovation Amongst Incumbent Players in the Insurance Sector

Much has been written about the rapid digitalization taking place in the insurance sector. Enabled in part by rapidly growing insurance technology “insurtech” investments, numerous new entrants are testing existing processes, distribution channels and incumbent positions.

Less has been written about the tech-enabled innovation taking place amongst incumbents themselves. Whether a broker, carrier or an administrator, many incumbents have embraced emerging technology. Some have pursued IoT to enhance data analytics and underwriting. Others have embraced workflow automation to break down silos internally and with external channel partners. Still others have implemented blockchain-based smart contracts.

To implement the innovation, incumbents have tapped all possible resources. Legacy enterprise software vendors have been asked to provide additional and better products. In-house and outsourced talent has been leveraged for customized solutions. And in many cases, new insurtech players have teamed up with incumbents. In fact, numerous key players are either investors in insurtech companies or have acquired them outright. Notable recent activity includes (i) Willis Towers Watson’s acquisition of TRANZACT, (ii) Zurich’s acquisition of Sea Pine and (iii) CoverHound’s Series D funding from a group which includes Aflac, Chubb, Hiscox and MS&AD. While it may be unusual, many insurtech startups are currently working in partnership with incumbents rather than competing to displace them.

In the insurance sector, knowledge and relationships remain key. As a result, existing players will continue to maintain a strong position in the foreseeable future. That said, they are cognizant of the demands of the modern insured. They are also well aware of the benefits of tech-enabled processes. As new technology continues to be embedded into workflow, incumbents in the insurance space are continuing to demonstrate their resilience and their openness to innovation. This openness will manifest itself partly through their continued M&A and capital investments.

MHT Partners, a leading business and information services investment bank, will continue to follow insurtech investment trends as tech-enabled innovation takes hold in the ever-evolving insurance industry. To learn more about MHT, please contact Kevin Jolley (kjolley@mhtpartners.com) or Sam Bahmanyar (sbahmanyar@mhtpartners.com).