On Growth

For Microsoft Partners, Now Is a Good Time To Think M&A

It's a seller's market in the IT industry, and Microsoft expertise is in particularly high demand.

Given the high degree of interest in mergers and acquisitions in the IT services market, and as a service to its partner community, Microsoft sponsored a session on M&A at this summer's Worldwide Partner Conference (WPC) in Orlando.

I was privileged to sit on the panel along with Mark Seeley, president of Intellinet; Nicholas Vossburg, director of cloud services at Comparex AG and former CEO of Bearing Point; and John Havlick, executive vice president at Comparex AG.

Panel moderator Brent Combest, director of partner profitability and compete for the Microsoft Worldwide Partner Group, emphasized the importance of preparing for M&A to Microsoft partners during the session.

"The cloud has changed more than just the profitability paradigm for partners. It's also provided an opportunity to increase shareholder value. Understanding how to construct a strategy to capitalize on this should be a key part to their next growth phase. This has proven to be top of mind for many partners whether they're looking to retire, they're an entrepreneur considering an exit strategy, or simply looking to source more investable income. We've assembled this session to help partners begin to develop a well-thought-out, disciplined, acquisitive growth strategy that puts them in the best position to maximize their valuation," Combest said.

For my part, I was asked to comment on the current landscape of M&A in the IT industry, including what buyers are looking for, the current trends in valuations, and the overall process for conducting a successful acquisition. For an overall view of the M&A market I referenced a recent survey (PDF) sponsored by Equiteq, an advisory and M&A firm focused on the global consulting market.

The timing for this session was opportune for many Microsoft partners because, as Equiteq concluded, "Microsoft expertise continues to be the largest vendor capabilities associated with IT consulting M&A deals." In other words, Microsoft expertise is in high demand.

Among the key findings of this survey are:

  • Consulting sector M&A deals increased 13 percent in 2014 compared to 2013, with deal volume in the IT consulting sector growing 15 percent.

  • IT has historically represented the largest proportion of the overall consulting M&A market. This is due to the high level of innovation that occurs in the broader IT industry relative to other consulting sectors.

  • The report indicates strong buyer demand continuing into 2015, although some uncertainty may have an effect on volumes and values in the latter half of the year.

  • Across the global consulting industry, a large majority (70 percent) of M&A volumes are small-value deals -- less than $40 million -- with 35 percent of reported acquisitions less than $5 million.

  • In 2014 there was an upward trend in EBIDTA and revenue multiples, highlighting a seller's market where demand from buyers is exceeding supply of sellers, ultimately keeping values high.

  • On average, between 50 percent and 60 percent of the deal price is paid up front with the remainder as earn-out over two or three years.

  • Transactions in IT consulting are driven by consultancies with strong capabilities in business intelligence, data analytics, cyber security, cloud-based delivery and smart mobile.

  • In value terms, the trend in revenue multiples of IT consulting firms continued to increase in 2014, while EBITDA multiples fell in line with the two-year trend. This is most likely explained by the fact that firms in the IT industry typically drive revenue more aggressively than profits, as the ongoing demand for innovation drives the need for internal investments.

  • Cloud-enabled intellectual property is in demand in order for firms to remain competitive in a rapidly changing IT landscape.

  • Microsoft, SAP and Oracle are the largest vendors that IT consulting firms focus on, and as such, advisers and systems integrators of ERP systems continue to make up a large and constant proportion of deals.

Net, net, it's a good time for Microsoft partners to be thinking M&A. Deal activity is high, propelled by the continuous demand for innovative technologies, particularly those offered by Microsoft.

More Columns by Mike Harvath:

About the Author

Mike Harvath is CEO of Revenue Rocket Consulting Group, an IT services growth consultancy.