How is the Coronavirus outbreak affecting M&A activity in the partner channel?

April 20 2020

With a plethora of data and surveys out in the marketplace regarding the economy and how the Coronavirus will affect the stock market and future company valuations, it’s hard to really understand how these forces will impact technology partners. After all, most surveys are not targeted to channel partners.

Ernst & Young published a survey last week of 2,900 global executives that found that 73 percent of respondents expect the COVID-19 outbreak to severely undermine the economy. The survey also showed uncertainty about when the market will recover. Some 54 percent of respondents anticipate a more gradual recovery on a U-shaped curve after a longer slowdown that will extend into 2021.

But how about technology partners?  You know, the ones who are providing some of the key services needed to keep the economy running?  How will Coronavirus effect our valuations and how long must we wait until we can return to January 2020 valuation peaks?

We ran a survey from March 22 to April 15 specifically targeted toward buyers of technology service providers in the lower mid-market ( i.e. VARs, MSPs, ISVs, CSPs, SIs and custom developers under $100M in revenue) to ask them specifically how this current environment will affect deals going forward: namely -  timing, valuation and deal structure. While the survey population is much smaller (sub 100 participants), we analyzed these results along with our own personal experience of completing two transactions of Microsoft partners during this same time period.  Here is what we found.  

Current transactions in process

Many companies are currently under a LOI or IOI at the time of this outbreak and, depending upon the strength of the customer base and the pipeline, those factors really determine whether the transaction will continue or not. Those partners who focus on an industry whose customers are greatly affected, i.e. airlines, travel industry, entertainment, and food service, are putting those transactions on hold or terminating them altogether. (This is probably a time when being vertical in one of the many hard-hit industries might not serve you well.) However, those partners that have a strong and diverse customer base and that have solid pipelines of contracted future services or a high percentage of monthly recurring revenue are continuing on in the acquisition process.

There are many technology partners who are able to take advantage of the current work-at-home requirements and increase their sales considerably, specifically MSPs, CSPs and those offering transition to the cloud from on-premise ERP services. Of the three active transactions I have been advising during the last four weeks, two have closed and one was canceled, but then a new buyer stepped in. So it’s not all doom and gloom, deals are still closing and still for 100 percent cash at close.  In general, however, here were the responses of our buyers to our survey:

As you can see, only 15 percent have paused indefinitely on current transactions. With the largest group at 45 percent pausing for a month or so while they continue to assess the market. And 25 percent of buyers still deciding future actions.

Future Buyer Acquisition Plans and Structure

Unlike the recession of 2008, cash is still available, and debt remains cheap. So almost no buyer with whom we spoke views this virus to be as dire as the last recession. Private equity is still sitting on $3T+ in cash they need to invest. Strategic buyers still have plenty of cash, and there are still record low interest rates. Will deal structures change slightly?  I believe they will, as even those buyers with cash will want to conserve as much as possible since no one really knows how long it will take for us to get back to normal.

About Linda Rose

After spending 25 years as a Microsoft Dynamics Partner, Linda decided to sell it all and retire. Well….almost. She now works with partners to help them increase the value of their companies. She draws on her experience as a CPA and CEO leveraging her personal experience on buying and selling four companies (sold two for 100% cash). Her most recent sale of her Microsoft cloud infrastructure company to a private equity firm together with her networking with buyers has given her a unique opportunity to understand the latest valuations partners can expect to receive or pay for technology firms which she shares in her book Get Acquired for Millions: A Roadmap for Technology Service Providers to Maximize Company Value”.

Today she works with partner organizations as an M&A Advisor, helping CEOs prepare to sell for their maximum value. Linda continues to share her knowledge through speaking engagements and  her blogs and a number of tools and resources on her website. She continues to remain an advocate for women in technology through her association with Women In Technology and Women in Cloud. Stay connected with Linda on LinkedIn at: https://www.linkedin.com/in/klindarose/

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