Key Takeaways
- • Deal volume in IT services M&A fell 11 percent year over year and declined another 8 percent from the second quarter, marking a second consecutive quarterly slowdown, according to John Holland, managing director at Corporate Finance Associates.
- • Holland attributes the slowdown to rising interest rates and tighter financing conditions, which pressure private equity buyers that rely on debt, and expects deal volume could stay flat or slip further before improving as rates decline.
- • Holland considers the slowdown a natural fluctuation rather than a downturn, noting M&A deal counts remain considerably higher than in 2018 and 2019.
- • MSPs remain among the most attractive targets, with Holland saying demand 'has not diminished whatsoever' due to recurring revenue models that appeal to strategic buyers and private equity firms.
- • AI solutions providers are drawing buyer interest, but limited supply of acquirable firms and valuation gaps persist, with earnouts cited as a way to bridge them.
Summary
M&A activity in the IT services industry slowed for a second consecutive quarter, according to CRN's reporting, though strong demand for managed service providers (MSPs) and renewed activity from major strategic buyers suggest the market remains resilient. Deal volume declined 11 percent year over year and fell another 8 percent from the second quarter, according to John Holland, managing director at Laguna Hills, Calif.-based Corporate Finance Associates, an investment banking firm focused on IT and telecom services M&A. The total dollar value of public transactions remained relatively stable despite the decline in deal count.
Holland linked the slowdown to higher borrowing costs. He said interest rates have been rising and that private equity funds, which rely on leverage when making acquisitions, are particularly exposed: "A small move in interest rates can squeeze the private equity firms." Buyers are also becoming more selective and some have adopted a wait-and-see approach. Holland does not expect a near-term rebound, saying volume could remain flat or decline further before improving as the Federal Reserve reduces rates and inflationary pressures ease. He nonetheless described the slowdown as a natural fluctuation, adding that M&A remains considerably higher than pre-pandemic levels in 2018 and 2019.
MSPs remain among the sector's most attractive targets. Holland said demand "has not diminished whatsoever," citing recurring revenue models, and noted that strategic buyers are active and the MSP sector continues to consolidate rapidly. Kevin Damghani, founder and CEO of ITPartners+, a newer acquirer in the space, said MSPs with predictable recurring revenue and strong customer relationships remain attractive and that AI is opening new efficiencies. He argued the biggest winners will be firms that create the most value from each acquisition through AI rather than those completing the most deals.
AI is emerging as another driver, as companies seek AI talent and solutions. Holland said demand outstrips supply because AI solutions providers, though growing quickly, remain small and few are available for acquisition. Valuation gaps can arise because AI business owners often price in future growth while acquirers focus on the last 12 months of financial performance. Holland said earnout agreements, which tie part of the purchase price to future performance, can help bridge that gap.
Holland linked the slowdown to higher borrowing costs. He said interest rates have been rising and that private equity funds, which rely on leverage when making acquisitions, are particularly exposed: "A small move in interest rates can squeeze the private equity firms." Buyers are also becoming more selective and some have adopted a wait-and-see approach. Holland does not expect a near-term rebound, saying volume could remain flat or decline further before improving as the Federal Reserve reduces rates and inflationary pressures ease. He nonetheless described the slowdown as a natural fluctuation, adding that M&A remains considerably higher than pre-pandemic levels in 2018 and 2019.
MSPs remain among the sector's most attractive targets. Holland said demand "has not diminished whatsoever," citing recurring revenue models, and noted that strategic buyers are active and the MSP sector continues to consolidate rapidly. Kevin Damghani, founder and CEO of ITPartners+, a newer acquirer in the space, said MSPs with predictable recurring revenue and strong customer relationships remain attractive and that AI is opening new efficiencies. He argued the biggest winners will be firms that create the most value from each acquisition through AI rather than those completing the most deals.
AI is emerging as another driver, as companies seek AI talent and solutions. Holland said demand outstrips supply because AI solutions providers, though growing quickly, remain small and few are available for acquisition. Valuation gaps can arise because AI business owners often price in future growth while acquirers focus on the last 12 months of financial performance. Holland said earnout agreements, which tie part of the purchase price to future performance, can help bridge that gap.
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