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MSP buyers weigh M&A integration vs. independence

MSP M&A activity is surging as investment dollars flow into the sector. How buyers handle the post-acquisition environment will determine whether the combination succeeds.

MSP acquisitions attract plenty of attention when pen meets paper, but what happens next is arguably more important for employees, managers, customers and investors.

Indeed, the post-acquisition strategy determines whether the business combination succeeds or enters a downward spiral. The options for MSP executives and investors range from quickly integrating the acquisition target to preserving its autonomy. In actual practice, the M&A integration vs. independence discussion proves more nuanced, with companies using elements of both approaches. The exact path depends on such variables as investment philosophy and the prevailing MSP business model.

One thing remains a near certainty with all acquisitions: The professional lives of the participants are going to change.

"After the contracts are signed, you are dealing with a rather strange period," said Walter Heck, CTO at HeleCloud, an AWS cloud consultancy and managed services company based in London. "You are migrating from being a standalone entity to being part of a larger organization."

HeleCloud in 2019 purchased Heck's company, OlinData, a consulting firm in The Hague, Netherlands.

The case for M&A integration

An MSP's views on integration shape how it will deal with the strange, new world of the post-acquisition period. Executives favoring integration acknowledged that the method isn't easy but contended that the results justify the effort.

Calligo, an MSP based in Jersey, a British crown dependency, has acquired 10 companies over the past three years, including four in 2020. The company integrates its acquisitions, rather than taking a holding-company approach by which a company maintains a loose collection of similar businesses.

Julian BoxJulian Box

"A holding company can get traction and size and buying power, but, ultimately, they don't get the optimization that we do," said Calligo Founder and CEO Julian Box.

While integration demands more work, taking steps such as harmonizing systems across companies produces long-term benefits, Box said. For example, using one monitoring system, rather than a multitude of tools, reduces licensing costs and training expenses.

That approach "makes us more cost-effective and more efficient," Box added.

Jason WojahnJason Wojahn

Thirdera, a cloud consultancy specializing in ServiceNow, launched in February 2021 after combining three acquired companies. The company plans to acquire and integrate smaller, regional service providers -- first in the U.S. and then in Asia and Europe -- to build a global consulting firm. Thirdera CEO Jason Wojahn said integration goes beyond operating under a unified brand.

"We don't intend to just stitch together these companies by name only," he said. "We intend to stitch them together in the way we operate."

Thirdera aims to harmonize methodologies, tools, processes and procedures so the companies it integrates can deliver consistent services. The standardization effort will also extend to how Thirdera defines job titles across the integrated companies. Developer, architect and project manager roles will function in the same way in every region the company operates, Wojahn said.

Private equity-backed MSP platforms, in which investors start with a foundational MSP and then acquire add-on companies, also take the integration route. Focus Investment Banking, a merger and acquisition advisory firm based in Vienna, Va., advised on five MSP platforms created in 2020, including General Informatics, an MSP based in Baton Rouge, La., that plans a multistate expansion.

Abe GarverAbe Garver

Those MSP platforms "are integrating the add-on companies in terms of branding, delivery approach [and] internal IT systems," noted Abe Garver, MSP team leader and managing director at Focus Investment Banking.

The independent approach

Evergreen Services Group, based in San Francisco, takes a different approach to acquiring MSPs. Since its launch in 2017, the private equity-backed holding company has acquired 27 companies in the MSP sector and assembled them into eight platform companies that operate independently.

"We don't integrate those businesses," said Ramsey Sahyoun, head of M&A at Evergreen.

Ramsey SahyounRamsey Sahyoun

One reason for forgoing integration is the limited geographic range of many service providers. MSPs, even with the increasing emphasis on remote service delivery, typically compete regionally, Sahyoun said. That regional focus makes it difficult for, say, an MSP in California to acquire an MSP in New York and then integrate the on-the-ground leadership, he noted.

Although Evergreen tends toward the unintegrated end of the MSP M&A spectrum, the company may pursue integration in some instances. Add-on companies joining a regional MSP platform provides one such case.

"If we do integration, we will do it in regional clusters," Sahyoun said.

Evergreen's eight platforms, meanwhile, don't operate in complete isolation. The company hosts two annual summits to bring together the platforms' CEOs and other key leaders. Specialized councils, meanwhile, meet to share best practices on such topics as organic growth and cybersecurity. Evergreen plans to develop more councils over time.

"We'll want to leverage the collective brain power and make sure we are doing the right things," Sahyoun said.

Evergreen's post-acquisition strategy influences how the company sizes up an acquisition candidate. The company's philosophy is to acquire MSPs that would do well as a standalone entity and not require integration into a larger platform. "A lot of mistakes are made in M&A when the success of an investment is predicated on nailing the integration," Sahyoun said.

We don't intend to just stitch together these companies by name only. We intend to stitch them together in the way we operate.
Jason WojahnCEO, Thirdera

He cited a hypothetical example in which investors can only generate a good ROI if they lay off the acquired company's finance and accounting team and consolidate branch offices. The approach can work, but Sahyoun cited the potential for "cultural impact," the loss of key employees and customer churn.

Post-acquisition integration phases

MSPs that integrate acquisitions usually take a phased approach. As with the unintegrated method, companies start with a checklist to assess the suitability of an acquisition target. The criteria, however, are inverted: Calligo looks for companies with characteristics that lend themselves to integration.

"If you don't have the list of criteria … that will allow you to integrate as smoothly as possible, you make the task 10 times more complicated and difficult to achieve," Box said.

No MSP is likely to satisfy every criterion, but Calligo will start serious discussions with an acquisition candidate that covers about 80% of the items on its checklist, he said.

The next phase of M&A integration focuses on people. MSP managers and technicians want to know how they will fit into the new organization and the effects on pay and benefits. An acquisition always introduces a note of uncertainty, so the buying company needs to reach out to employees as soon as possible.

Walter HeckWalter Heck

"One of the main considerations is, 'How do I make sure the team stays connected and engaged with the new reality?'" HeleCloud's Heck noted.

"We start with the team we are acquiring," Box said. "Like any technology company, especially an MSP, people are the No. 1 priority from a service-delivery perspective and, ultimately, you want to get them into the business as soon as possible."

Speed is fundamental. While Calligo thought its original onboarding process was fast, it found over the course of transaction that employees wanted an even faster pace. Today, Calligo performs as much preparatory work as possible during the acquisition process, addressing areas such as employment contracts and, when possible, potential organizational charts before the deal is done, Box explained.

"This allows us to move quickly in the first weeks," he said.

Other integration steps include an initial meeting with employees as a group, followed by individual consultations to get employees on new contracts and explain their roles in the combined organization.

Evergreen prioritizes people in its regional integrations. Sahyoun said the acquiring organization needs to pin down payroll and benefits at the close of the deal. "You can't stub your toe on employee compensation and benefits," he said.

Branding considerations also surface early on in the integration process. To smooth the path to a new corporate identity, it's best to rapidly drop the old brand. "I made it a point to as quickly as possible migrate away from the [OlinData] name to HeleCloud Netherlands," Heck said. "That's particularly important for newcomers to the team that have never worked for the old company."

With human resources and corporate identity covered, the next phase involves rationalizing and integrating IT systems. Calligo's process for integrating business operations takes 90 to 120 days, while technology rationalization requires four to six months, Box said. The technology portion takes longer because each system or product is standardized according to its own timeline. Calligo determines that timeline based on "balancing ease of replacement with performance, management efficiencies, cost and, of course, customer experiences and data safety," he noted.

Companies may delay standardizing on tricky-to-replace systems until the technology refreshment cycle kicks in, when a change becomes necessary anyway. Sahyoun said MSPs should wait to deal with systems, as well as repackaging managed service offerings, until the final phase of integration. Companies that tackle those chores too soon "run the risk of disrupting the existing client base," he said.

Practice does not make for perfect MSP integrations, but corporate combinations can become easier with repetition. Between "doing one of them and doing the tenth, you learn how to do it better each time," Box said. "But you always learn something new. Never go into it thinking you already know everything."

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