Channel Summary: M&A Shows No Signs of Slowing Down

The UK channel has been through a turbulent period in the past month, with mergers and acquisitions (M&A) continuing to change the landscape in a way that defies any previous predictions of a slowdown. While the managed services industry is familiar with mergers and acquisitions, it has never been more prepared for investment. Despite dealing with a global pandemic, recession and labour shortages, the relentless drive for growth and consolidation shows no signs of stopping. This dynamic environment sets the stage for a closer look at recent acquisitions.

Take Peterborough-based managed services provider (MSP) Rydal Group, for example. Its strategic acquisition by Cambridge-based My Communications is a prime example of this trend. By integrating My Communications’ expertise in telephone system connectivity and mobile services, Rydal Group has significantly strengthened its telecommunications services. The move not only expands its customer base to over 2,500, but also boosts annual turnover to over £11 million. This local example is mirrored in activity elsewhere.

In Scotland, MSP Workflo Solutions’ acquisition of fellow Scottish MSP MacD IT demonstrates the drive for regional consolidation. This deal aims to provide more comprehensive service solutions by combining regional expertise. Further, Nordic MSP Advania’s acquisition of UK VAR Servium underlines the importance of geographic expansion and service enhancement. This acquisition not only increases Advania’s reach in the UK but also strengthens relationships with suppliers and distributors.

These acquisitions reflect broader market trends reported by global investment bank Drake Star, which indicate a significant increase in M&A activity in the SME sector. Specifically, Q4 2023 saw a 54% increase compared to the previous quarter. Firms are eagerly driving this growth as they seek to expand their service offerings and customer bases.

Decision Factors: Why Do SMEs Choose Mergers & Acquisitions?

M&A is a topic that SMBs are considering for several reasons. First, most mid-market businesses now have established IT solution providers (ITSPs) that provide a significant number of services, making it difficult to replace them. As a result, there are fewer new potential customers in the market, which increases the difficulty and cost of acquiring new customers. Acquiring another company with a customer base of recurring revenue is often cheaper than growing organically.

Second, staffing challenges make organic growth through recruitment difficult. Acquiring an MSP that specializes in the desired services can be a faster route to achieving goals compared to hiring new talent and building services in-house. Buying a cohesive team is potentially easier, although many acquisitions will combine administrative, HR, and marketing functions to achieve cost savings.

Finally, market saturation and increased competition are leading SMEs to consider M&A strategies. While M&A traditionally involves risk, the increasing difficulty of differentiation and the rising costs of customer acquisition are making taking that risk more acceptable. Despite the inherent risks, this strategic approach is becoming increasingly attractive, especially given the lucrative potential of the SME sector, highlighted in The Drake Star report.

The study highlights that the global managed services market, which was valued at $283 billion at the end of 2023, is expected to grow to $552 billion by 2032. This growth is being driven by increasing IT complexity and rising demand for cost-effective managed services.

Merger & Acquisition Challenges: Market Diversity and Competition

However, amidst this frenzy of growth and consolidation, there are critical challenges that the industry must address. While these three strategic acquisitions (Rydal Group, Workflo and Advania) demonstrate that these companies are willing to do whatever it takes to streamline service delivery and expand capabilities, they also raise concerns about market diversity and competition.

As larger SMBs continue to grow through strategic acquisitions, smaller players face an uphill battle to remain competitive. This can lead to monopolistic tendencies that stifle innovation and diversity in the marketplace. The challenge for the SMB industry will be to balance the benefits of strategic growth with the need to maintain a competitive and innovative market environment. Ensuring that smaller SMBs can thrive alongside larger players will be key to supporting a dynamic and diverse marketplace that continues to deliver innovative solutions and exceptional customer service.

Diversity in the marketplace, both among smaller and larger SMEs, is highly beneficial. It drives innovation as diverse companies bring unique perspectives and solutions. Smaller SMEs can quickly adapt to new technologies and trends, driving rapid advances. This diversity provides customers with access to a wide range of customized services, increasing overall service quality and encouraging continuous improvement. In addition, a marketplace with diverse players promotes resilience, reducing dependence on a few large players. Ultimately, this diversity fosters a dynamic competitive environment that delivers unique innovative solutions, meeting diverse customer needs and contributing to a strong, growing industry.

There is, however, another perspective worth considering. The wave of consolidation can also be seen as a necessary evolution that is driving the industry toward greater efficiency and stronger service standards. Smaller SMEs struggling to compete may see this consolidation not as a threat but as an opportunity.

By joining forces with larger, more established players, they can leverage greater resources, advanced technologies, and broader market reach that would otherwise be unattainable. This perspective suggests that consolidation can lead to a more robust, resilient industry overall, in which the collective power of fewer but more powerful players drives innovation from a position of stability and security.

However, several factors can make it difficult for smaller or mid-sized SMEs to merge with larger entities. First, cultural differences can lead to integration challenges, disrupting operations and employee morale. Second, the costs and complexity of a merger can be prohibitive, especially for smaller companies with limited financial resources. Third, smaller SMEs may fear losing autonomy and flexibility—key benefits often highlighted by boxxe CEO Phil Doye in our upcoming High Growth 100: Mergers, Acquisitions and Investments report. In addition, navigating the legal and regulatory requirements during a merger can be daunting. Finally, there may be a misalignment of strategic goals, making it difficult to find a compatible partner. These factors can collectively discourage smaller SMEs from merging with larger companies.

Looking Ahead: The Future of the Industry

Despite these challenges, the managed services industry, like many other highly consolidated sectors such as semiconductors, healthcare services and media, remains fiercely competitive, and every company faces significant headwinds.

SMBs have raised their standards to adapt to today’s uncertain economic climate, labor shortages, and political climate. As deals continue, companies will have to decide whether to acquire or be acquired by larger firms in order to survive. This decision will shape the future landscape of the industry, determining whether it will remain diverse and competitive or become more consolidated and unified.