The Secret to a Successful IT Services Provider Merger
You’ve heard about the big dance: MSPs and VARs buying each other at a rapid pace — sometimes to make a regional land grab, or perhaps to gain expertise in a specific vertical market or technology niche. But what’s the real secret to a successful IT services merger?
The simple answer is trust, according to Rick Murphy, CEO and managing partner at Cogent Growth Partners — a buy-side consulting firm. “It’s all about building a relationship of trust between the buyer and the seller,” says Murphy. “Without trust, the deal isn’t going to get done.”
Cogent has advised on more than 60 M&A deals over the past six years. One of them involved Aldridge buying two Seattle-area IT service providers in February (join our March 31 webcast for details from the buyer and sellers).
Instead of positioning itself as a broker, Cogent describes itself as an intermediary — an experienced team that can help buyers to find and engage the right sellers. The trick: Finding ideal sellers that don’t realize they’re potential sellers just yet.
Cogent’s M&A Experts
Murphy and his two business partners — VPs George Sierchio and Bruce Teichman — described the Cogent business process to ChannelE2E during an hour-long conversation earlier today. We also explored the state of the M&A market, and discussed valuations quite a bit.
Without getting into the secret sauce, Cogent has built standardized processes to bring the right buyers and sellers to the table. Built with a buy-side focus, Cogent carefully vets potential buyers to make sure they have a good mindset and financial wherewithal to pursue M&A deals. Armed with a clear mandate and parameters from the buyer, Cogent’s team scours the market for potential sellers — and not the type that are in desperation mode to sell. Through a range of confidential discovery calls and more, Cogent eventually identifies candidates for the buyer.
Cogent’s leaders didn’t just “stumble” into the M&A advisory market. Before launching Cogent in 2010, Murphy gained M&A experience in the media industry. Sierchio consulted in the IT services market for a decade before joining Cogent in January 2012. And Teichman built and sold an IT services business before running All Covered‘s M&A practice until November 2013.
The Evolving M&A Landscape
The nuts and bolts of buying or selling a business haven’t changed much over the past decade. But the variables for success certainly have. Amid the rise of contracted (i.e., recurring) revenues and cloud capabilities, sellers and buyers now need to study and master more moving parts before entering into a potential deal, notes Teichman.
Overall, valuations have also climbed — generally speaking — because MSPs and IT service provider leaders have joined peer groups and associations that drive business learnings, Teichman adds. Still, Murphy is quick to note: If you hear rumors about sky-high valuations then it’s probably exactly that — just a rumor.
The ultimate conversation that a buyer and seller have to consider: “Are we better together for the long haul?”says Teichman. If both sides can’t answer “yes” then the deal isn’t meant to be.
Cogent typically represents IT service providers (the buyers) that generate annual revenues of about $10 million or more, notes Sierchio. But there are certainly some larger buyers in Cogent’s wheelhouse, including private equity firms.
On the sell-side, Cogent typically helps buyers to find sellers that are $2 million to $8 million in annual revenues — though smaller and larger sellers have also been in the mix.
Cogent focuses on the buy-side of the deal because it allows the company to develop long-term relationships — helping buy-side clients with multiple acquisitions over the years. A sell-side focus would have involved “one and done” transactions, which didn’t interest Murphy. Still, the company does offer guidance to sellers — making sure they are aware of the key milestones and hurdles they’ll need to clear as part of due diligence and more.
Most of Cogent’s work involves U.S.-based M&A, but the company has also been involved in deals in Canada and Australia — with more regions on the way. In terms of deal activity, Cogent says the market remains healthy. “It’s harder to get larger than it used to be and it’s tougher to be smaller,” says Teichman. “So the motivations for deals have increased.”
Adds Sierchio, “Every few years something in this market reinvents itself. And owners face another inflection point in terms of whether they want to pursue the next round of growth on their own.”
Murphy puts it another way: “It’s hard for an MSP or IT service provider to grow its business one client at a time.” With that reality in mind, the M&A industry wheels continue to turn.