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SolarWinds MSP Potential Spin-Off: 10 Things to Know

SolarWinds ($SWI) is considering a potential spin-off of its SolarWinds MSP software business. But what exactly does that mean for managed IT service providers (MSPs) and technology companies that integrate with the software company’s IT management and business automation tools?

ChannelE2E tracked down answers in an interview with CEO Kevin Thompson and SolarWinds MSP President John Pagliuca. Based on that interview and additional ChannelE2E reporting, here’s an FAQ about the potential spin-off, and associated partner implications.

Q1: Why is SolarWinds considering a potential spin-off of the MSP software business?

ChannelE2E’s spin: SolarWinds this year is on track to generate about $700 million from corporate IT management software sales, and $300 million from MSP software sales. Spinning-off SolarWinds MSP would allow that business unit to more easily pursue R&D and M&A tuck-in deals that don’t necessarily align with SolarWinds’s corporate IT business and/or profit model. That makes sense, but it also essentially confirms that trying to fine-tune some of SolarWinds’ corporate IT software for MSP consumption is a tricky process that doesn’t always pay big dividends. Clearly, SolarWinds MSP wants to double down on software that’s designed purely for MSPs.

Q2: Who would run a potential SolarWinds MSP business spin-off?

ChannelE2E’s spin: John Pagliuca, currently president of SolarWinds MSP, would run the spin-off, Thompson told ChannelE2E. Also, the SolarWinds MSP executive team and staff would remain in place. This isn’t about swapping out talent or finding new leadership. Still, some new seats at the table — perhaps talent focused on public market expertise — might also be involved in the spun-off business.

Related: To get a feel for Pagliuca’s management style and view of the MSP market, check out this video interview — recored by ChannelE2E in June 2020.

Q3: Who would own SolarWinds MSP if the business is spun off?

ChannelE2E’s spin: Ownership essentially wouldn’t change. Current SolarWinds business ownership — Thoma Bravo, Silver Lake and $SWI shareholders — would also own the spun-off MSP software business. But the spin-off would truly be a separately, publicly held software company.

Q4: Is SolarWinds MSP essentially up for sale?

Kevin Thompson, CEO, SolarWinds

ChannelE2E’s spin: Thompson said absolutely not. Current SolarWinds ownership plans to maintain its ownership in the MSP business — whether it’s spun off or not, he said. Still, a spin-off process could tempt some third-party software companies to knock on SolarWinds’ door about potential M&A synergies, ChannelE2E suspects.

Q5: When will SolarWinds decide whether or not to spin off the MSP software business, and what factors are involved?

ChannelE2E’s spin: A decision and the actual spin-off — if implemented — won’t be made until 2021, Thompson told ChannelE2E. Near term, SolarWinds is evaluating what type of additional talent and resources may be needed for SolarWinds MSP to run as a standalone company, and what steps would be needed to de-coupled the MSP business from certain corporate processes and some internally shared services.

Q6: What type of growth could SolarWinds MSP generate as an independent company? 

ChannelE2E’s spin: SolarWinds MSP’s financial model would potentially shift a bit if the company becomes an independent business. The focus would be less on bottom-line profits and more on top-line growth. Thompson believes SolarWinds MSP can be a “Rule of 50” company — far better than the well-known Rule of 40 growth target for SaaS and subscription businesses.

Q7: What could potentially derail a SolarWinds MSP spin-off?

ChannelE2E’s spin: That’s a tricky question given the current coronavirus economy. Initial reaction to the spin-off idea on Wall Street didn’t raise any major red flags on August 6. But Thompson says the decision process won’t be based on day-to-day stock market swings and Wall Street reactions. He notes that Wall Street initially didn’t like SolarWinds MSP’s 2013 buyout of N-able — but that deal provided the foundation for today’s SolarWinds MSP business.

Q8: Are there any publicly held software or technology companies focused purely on MSPs in the SMB sector?

ChannelE2E’s spin: Nope. Although the MSP software market has been growing double-digits over the past decade or so, it has been a highly fractured market and no single company has come close to generating $1 billion in revenue.

Private equity firms along with some platform providers (SolarWinds, ConnectWise, Datto, Kaseya and others) have been making investments and buying up MSP-focused software and technology firms. But most of the industry remains private equity owned. Datto has been exploring an IPO, and Kaseya will likely make a strategic move in the next year or so. But to date, there is no pure play MSP technology company that’s publicly held.

Part of the challenge involves the MSP technology business model. SaaS companies focused purely on end-customer consumption and horizontal applications (i.e., Box, Office 365, G Suite, etc.) can market and scale to the masses.

In contrast, MSP-focused technology companies must evangelize to small business partners. And those partners, in turn, need to both consume the technology while selling and extending it out to SMB customers. That potentially leads to longer and more expensive sales cycles. But it also leads to more successful SMB business performance — for MSPs and SMB customers alike, ChannelE2E believes.

Q9: If the spin-off happens, will SolarWinds MSP have a new name?

ChannelE2E’s spin: Yes, Thompson says. One name under consideration: N-able… the well-known MSP software business brand that SolarWinds acquired in 2013.

Q10: What are the odds of SolarWinds spinning-off SolarWinds MSP?

ChannelE2E’s spin: Just a hunch, but we suspect there’s an 80 percent or higher chance that the spin-off happens in 2021 or so.

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