Opportunities and Challenges for Managed Service Providers in 2023

Despite facing a series of geopolitical disturbances, the global mergers and acquisitions (M&A) landscape is expected to remain resilient in Q2 2023, according to Intralinks’ Deal Flow Predictor. Specifically, M&A activity is forecasted to be steady compared to Q1 2023 and show considerable growth when contrasted to Q2 2022. This persistence in M&A activity, in the face of challenging times, can potentially offer lucrative prospects for Managed Service Providers (MSPs), though they should be prepared for certain hurdles.

Economic Instability: A Potential Goldmine for MSPs

Intralinks’ report emphasizes that economic downturns often yield high-value M&A deals, as acquisitive firms typically reap higher returns during these stress periods, which is highlighted by the Bain study cited in the report. This is a crucial insight for MSPs as it indicates that economic turbulence, while problematic, can present substantial opportunities.

Managed services, due to their predictable, recurring revenue streams and scalable business models, often make attractive targets in M&A activity, particularly during economic instability. They have the potential to provide a stability that’s sought after by acquisitive companies in such periods. This could also be a great opportunity for MSPs looking to expand their offerings and enter new markets through strategic acquisitions.

An example of this is Kaseya acquiring the MSP Datto in June 2022 for $6.2 Billion in order to strengthen its ‘IT Complete’ platform and offer better solutions to help their clients boost profitability and efficiency.

Robust M&A Activity in EMEA Region, Particularly in the UK

Despite the ongoing conflict in Ukraine, M&A activity within the EMEA region, especially in the UK, is expected to stay sturdy. The report identifies banking, retail, and technology as the sectors most likely to experience M&A activity in the UK. As an MSP, it’s worth noting the potential for increased demand for services within these sectors, particularly technology. Technology-focused MSPs can take advantage of this climate, providing vital support to newly merged or acquired companies who need to integrate and streamline their IT systems.

Potential Headwinds and Barriers

Nevertheless, MSPs should remain aware of potential challenges. The report cautions that financial instability, particularly surrounding U.S. banks and rising interest rates, could negatively influence M&A activity during 2023. These developments may tighten financing conditions, presenting obstacles for deal-making. MSPs, especially those seeking to make acquisitions or be acquired, may face challenges with securing the necessary financing.

Matt Wells – VP, Global Product Marketing & Strategy at Intralinks writes “If U.S. and European banks feel added pressure to shore up capital reserves, which can negatively impact mid- and lower-mid-market financing, acquirers may begin to see lending facilities tighten for acquisitions or higher borrowing costs that may impair valuations.”

As mentioned, increased pressure on capital reserves might potentially increase borrowing costs, impacting valuations. MSPs must keep abreast of these financial trends, adjust their business strategies accordingly, and ensure robust financial management to maintain their attractiveness in the M&A market.

What does this mean for your business?

Companies capable of accumulating capital for acquisitions might unearth excellent value opportunities amid economic unrest. For MSPs, this could mean strategic acquisitions to expand service offerings, client bases, or geographical reach. Rigorous due diligence is key here, as these potential rewards come with inherent risks.

In conclusion, while 2023 is expected to bring its fair share of economic uncertainties and challenges, MSPs are well-positioned to seize potential M&A opportunities. By keeping an eye on the ever-evolving financial trends and leveraging their inherent stability and scalability, MSPs can navigate through these headwinds and even come out stronger.