Datto Explores Potential Sale; Private Equity Interested in MSP Technology Provider

Datto is exploring a potential sale, and private equity firms have expressed interest in the MSP technology provider, according to Bloomberg.

Datto is publicly held ($MSP) and currently backed by Vista Equity Partners. The company's market cap is $3.8 billion, according to Yahoo finance. Neither Datto nor Vista Equity commented on the Bloomberg report.

Datto and MSP Technology Rivals

Datto, originally known for backup hardware appliances tied to cloud services, has aggressively expanded to offer cloud-centric software that allows MSPs to manage, monitor and safeguard SMB networks. The expansion strategy appears to be performing well. Indeed, Datto’s total revenue was $164.3 million in Q4 of 2021 — up 18% from $139.0 million in Q4 of 2020. Also, net income was $5.7 million — compared to a $7.2 million net loss in Q4 of 2020.

Still, Datto's stock trades at $23.37 as of March 17, 2022 -- down from an IPO open of $32 in October 2020. The challenge looks something like this: The MSP market is growing nicely, but some MSP technology providers have not grown nearly as rapidly as public cloud providers such as Microsoft Azure and Amazon Web Services (AWS). Technology investors often view stocks through a public cloud/enterprise lens, and that has limited the performance of MSP-oriented stocks, ChannelE2E believes.

Datto's key rivals include ConnectWise, Kaseya, N-able and NinjaOne in the MSP technology market, and numerous cloud backup providers -- names like Acronis, Arcserve-StorageCraft, Axcient, Carbonite (owned by OpenText), MSP360 and Veeam, among many others. Private equity firm Thoma Bravo backs both ConnectWise (privately held) and N-able (publicly traded, $NABL). Venture capital firm Summit Partners has a stake in NinjaOne, which has pursued an organic software development strategy rather than M&A. Many of Datto's rivals are generating double-digit percentage revenue growth year-over-year, with NinjaOne growing the fastest, according to the chatter we’ve heard.

Datto: Potential Buyers and Bidders?

M&A rumors involving two of the Big Four MSP technology suppliers (ConnectWise, Datto, Kaseya, N-able) have surfaced off and on for more than a year. Among the reasons: Kaseya, backed by private equity owners Insight Partners and TPG, has been seeking a financial event such as a potential IPO or a recapitalization-type move. Amid Kaseya's financial journey, rumors about a potential ConnectWise-Kaseya business combo surface from time to time -- but again, that's just an occasional rumor.

Now, Datto's apparent decision to explore a potential sale will likely inspire all of the players to examine the competitive landscape for potential business combinations and their implications. Still, there's no guarantee that Datto will actually participate in or complete a sale, Bloomberg noted.

The M&A wildcards include private equity firm Thoma Bravo -- which backs ConnectWise, Barracuda Networks, N-able, Sophos and many other technology firms. In theory, Thoma Bravo could acquire Datto and maintain it as an independent business, or potentially merge it with another portfolio company.

Meanwhile, we don't know if publicly held technology giants -- names like Cisco Systems, Dell Technologies, Hewlett Packard Enterprise (HPE), HP Inc., Lenovo and Microsoft -- will take a look at Datto. Of those companies, Datto has the most apparent synergies with Cisco Systems. Indeed, Cisco now heavily favors MSPs as its go-to-market strategy. And Datto's product line (mostly cloud services with some hardware appliances and networking gear mixed in) aligns well with Cisco's product portfolio, ChannelE2E believes. Still, we don't know if any of the big enterprise IT providers will potentially bid for Datto.

Datto: MSP Technology and Cybersecurity Business Reach

Datto could be a tempting acquisition target for a deep pocketed buyer that wants to play big in the MSP technology market. Indeed, Datto as of the end of 2021:

Datto is also striving to blend organic growth with acquired technology. Key moves include acquiring Infocyte for Endpoint Detection and Response (EDR) technologies and Managed Detection and Response (MDR) services. It sounds like a promising acquisition, though Datto will face intense competition from far larger and rapidly growing EDR and MDR software and service providers — including a newly minted unicorn named eSentire.

And What About DattoCon 2022?

Curiously, Datto has yet to announce an official date and location for its annual DattoCon 2022 conference. CEO Tim Weller during a recent earnings call said the company was targeting Q3 to potentially host DattoCon 2022. DattoCon is a very popular event for MSPs -- but a big expense item for Datto. We wonder if Datto is holding off on a DattoCon event announcement amid the potential M&A discussions -- but again, that's speculation on our part.

Updated March 24, 2022: DattoCon 2022 is now confirmed for September 11-13 in Washington, D.C, the company disclosed on March 24, 2022.