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August 3, 2020

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

MHT Partners  | Business & Information Services Investment Bank

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/)

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