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Specialisation pays in managed services’ valuations

At last week’s European Managed Services Summit, Jonathan Simnett, director of Hampleton Partners presented on the M&A side of the managed services market (pictured). Talking to him afterwards, his first point is how this fast-moving market has changed since he was here last year:

JS “They say the more things change the more they stay the same. And certainly with generic vanilla managed services businesses the valuations have stayed flat at around 10x. But the good news is if you're a very progressive managed service business and you have a specialisation in a particular vertical market certainly the valuations in virtually all specialties have increased.”

IT Europa: “How about a technology specialization. Because we've seen things like AI and blockchain creeping into our presentations in major ways. Is there any advantage to an MSP yet in adopting some of these?”

JS “I think that will be the case in the future but I think everybody's talking a good game about AI.  At the moment, if you really want to get a high valuation the place to be is e-commerce or potentially automotive.”

IT Europa: And how's the picture across Europe? Any country differences or regional differences?

JS “I don't think there's a huge difference but certainly the German market is incredibly active at the moment. Again, automotive and e-commerce; and a growing interest in the Internet of Things.

It is almost impossible to predict [the future]. Undoubtedly MSPs are going to be selling applications which will have a high value of AI. But actually it's machine learning and I think we're still a long way away from true AI presentations. I think we need to look very carefully at all the legislation for bringing about it. Certainly, automotive is going through an existential crisis at the moment and will have changed enormously in 10 years’ time. So there's opportunity in enabling electric vehicles and autonomous transport. And there are huge opportunities in the systems around things like car rental/car clubs.

Certainly, the whole success in the retail chain is going to have to change massively because of the value proposition is very different, particularly in managed services. Their value is what they deliver to the customer.

IT Europa: So is it the size and quality of the MSP customer list? actual revenues or potential?

JS The real value comes in intellectual property and the difference between a so-so valuation of that sort of business and a high valuation is the amount and quality of intellectual property. So if you're simply a body shop, delivering knowledge services with other people's technology the valuation is going to go low.

“If you are a company that has its own intellectual property and vertical market expertise and has its own software packages or other proprietary technology that they can sell then the valuation goes up.”