SolarWinds Explores MSP Software Business Spin-Off
SolarWinds ($SWI) may spin off its MSP software business as a standalone, publicly held company, the IT management software provider disclosed after U.S. markets closed today. If completed, SolarWinds shareholders would own shares of both companies, the business said.
Related Coverage (Updated August 7, 2020):
- Interview: CEO Kevin Thompson & SolarWinds MSP President John Pagliuca explain potential SolarWinds MSP Spin-Off
- FAQ: 10 Things to Know About Potential SolarWinds MSP Spin-Off
- Financials: Quarterly SolarWinds MSP Revenues
Original ChannelE2E Report (August 6, 4:21 p.m. ET): In a statement, SolarWinds said its board of directors has “authorized the company’s management team to explore a potential spin-off of its MSP business into a newly created and separately traded public company.”
Kevin Thompson, CEO, SolarWinds
In a prepared statement, SolarWinds CEO Kevin Thompson said:
“We are exploring a potential spin-off transaction because we believe that, if completed, a spin-off may enhance the successful operation of both the MSP and the Core IT Management businesses and increase their respective values. By splitting the two businesses into separate companies, it may be that the business and related investment, spending and capital allocation policies of each company could be managed consistently with each business’ objectives. Establishing specific and independent goals may enable both the Core IT Management and MSP businesses to manage investments and objectives that are more closely tailored to each business’ market needs and customer requirements. Should we move forward with the spin-off, we would expect that the Core IT Management business would be focused on maintaining our best-in-class profit margins, while the MSP business would be focused on long-term growth with strong, differentiated profitability metrics for a SaaS business.”
The company statement continued:
“If completed, the standalone entity would provide broad and scalable IT service management solutions designed to enable managed service providers, or MSPs, to deliver outsourced IT services for their small and medium size business end-customers and more efficiently manage their own businesses. SolarWinds would retain its Core IT Management business focused primarily on corporate IT organizations. SolarWinds believes that, if completed, the potential spin-off would enable shareholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each to pursue its own distinct business strategy and capital allocation policy.”
Still, completion of any spin-off is “subject to various conditions, including final approval of SolarWinds’ board of directors, and there can be no assurance that the potential spin-off transaction will be completed in the manner described above, or at all. If SolarWinds proceeds with the spin-off, it does not expect to complete the transaction earlier than the end of the first quarter of 2021.”
Potential SolarWinds MSP Spin-Off: What It All Means
To be clear: The potential SolarWinds MSP standalone company would focus purely on MSPs that support small business customers. SolarWinds corporate is still exploring whether such a move would be practical, and no imminent moves are planned.
Both sides of the SolarWinds business have generated long-term growth. But enterprise software and MSP software typically involve different pricing and profit models, ChannelE2E believes. Spinning out the SolarWinds MSP business, in theory, would allow that operation to more fully optimize its focus on MSP priorities — without worrying about overall enterprise business objectives set by the SolarWinds mother ship, ChannelE2E believes.
Potential SolarWinds MSP Spin-Off: What It Means to Partners
There’s no guarantee that the SolarWinds MSP business spin-out will occur, nor should MSPs (managed IT service providers) worry about a change of ownership.
The reason: Together, Thoma Bravo and Silver Lake own roughly 85 percent of SolarWinds. The other 15 percent of SolarWinds involves publicly owned stock — traded under the $SWI symbol.
A potential spin-off of SolarWinds MSP would create a second, separate publicly traded stock — backed by those familiar Thoma Bravo and Silver Lake investors. Essentially, the spin-out wouldn’t be a change in ownership. Instead, it would be a change in organization designed to give both sides of the house more freedom to pursue and serve their primary audiences, ChannelE2E believes.
SolarWinds MSP and Numerous Rivals: Still Growing
Regardless of the path forward, the MSP market is is still growing. SolarWinds first entered the market by acquiring N-able Technologies in 2013. Additional acquisitions have involved LogicNow (2016), Passportal (2019), among others.
Still, there are no pure-play MSP technology companies that are publicly held. Rival Datto is exploring a potential IPO, and Kaseya has been mulling next strategic moves as well. The competition also include ConnectWise, but that company is earlier in its private equity ownership journey and not poised near-term for an IPO, ChannelE2E believes.
Just an aside – if you want to lose MSP’s as clients, go ahead and do an IPO – suddenly your business becomes 100% profit driven (profit isn’t bad, but we already see a huge shift in CW, SolarWinds, Datto, et al that they seem to care a whole lot less about their clients, and a whole lot more about the next aquisition/price jump), oops, i meant Shareholder Value. Nothing will get done except that which bounces the stock price up.
You want to know how competitive the PSA/RMM market is? Dissect this comment – “we would expect that the Core IT Management business would be focused on maintaining our best-in-class profit margins, while the MSP business would be focused on long-term growth with strong, differentiated profitability metrics for a SaaS business.”
Anon: On a related note — SolarWinds MSP has essentially been publicly held (as part of SolarWinds) since 2018…
Jay: I hope all is well. Yup. It’s certainly competitive in the MSP software market these days. But Thompson also thinks there’s an opportunity for SolarWinds MSP to be a potential ‘Rule of 50’ SaaS business. If the spin-out happens, we’ll be keeping an eye on that KPI.
-jp
Channeling Yogi Berra here, “it tough to make predictions, especially about the future.” I am no analyst and don’t play one on TV, but how many of any of us saw Ingram’s sale coming, much less the ongoing ingestion of smaller, more innovative firms by Continuum, Kaseya, or even Solarwinds itself.
But even I can see that each time an Enterprise focused behemoth buys one of these nimble, SMB focused firms, they are in for some rude awakenings. CxOs? Technology roadmaps? IT budgeting and five-year plans? SMBs don’t behave like the Enterprise and they don’t have and to these things.
And that makes things a lot tougher for profit-driven. But for those of us that have toiled in these SMB trenches, there are some realities on the ground that are simply not apparent at 30,000 feet It feels like these purchases are based on the idea that SMBs behave just like small Enterprises. They do not.
Who knew that acquisitions were so complicated?
Joshua: Thanks for your note. I think each M&A deal has to be judged on its own merits and outcomes. But I also wonder if readers realize N-able essentially was about a $15M to $25M annual revenue business when SolarWinds made the acquisition in 2013. I don’t think N-able could have scaled without a new owner. But again, I realize each M&A deal (and the associated outcome) can vary wildly.
Best,
-jp