Rapid Microsoft Adoption & The Opportunity for IT Service Providers
Panther Equity Insights -- a private equity newsletter covering all things IT & Telecom, Tech & Business Services, eCommerce and Markets.
Welcome back to another edition of Panther Equity Insights!
If you're new here, we're thrilled to have you on board. We offer industry insights and thought leadership on IT & Telecom Services, Tech & Business Services, and eCommerce.
In this week’s edition, we’ll dive into the following:
Rapid Microsoft Adoption and the Opportunities for IT Service Providers
Chart of the Week: Cloud Segment Growth
IT M&A: Q1 Headwinds
Industry commentary from across Panther’s ecosystem
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Before we begin, if you’re a company Founder / Shareholder interested in working with Panther, a deal maker interested in connecting or with a deal to share, or an Operating Executive looking for a part-time, full-time, or a Board Level Role — feel free to get in touch with us!
Broader Market Chatter
Rapid Microsoft adoption opens vast opportunities for IT Service Providers
The 2023 ISG Provider Lens Microsoft Cloud Ecosystem report finds U.S. companies have been investing heavily in Microsoft platforms including 365, Power Platform, and Azure throughout the pandemic and remote work era. They adopted these products to first manage pandemic hurdles but are now looking for full integration of the Microsoft suite to unleash the maximum potential of digital transformation.
IT partners within the Microsoft ecosystem are now finding plentiful opportunities to fill operators’ lack of familiarity and IT skills to assist with tasks such as increasing efficiency within Azure and moving to modern microservices architectures.
For providers looking to target sales across the Microsoft ecosystem, the following article outlines what operators are focusing on when choosing an Azure CSP, MSP, or IT Solutions partner:
Certifications
Years of experience
Case studies
Headcount dedicated to Microsoft solutions
Resources provided to the Microsoft department
Multi-vendor device support
Additional services
About Us
Panther Equity Group is a private equity firm focused on making investments within the IT & Telecom Services, Technology Services, Business Services & eCommerce verticals.
Our team and Operating Partners have decades of experience within the mentioned verticals along with a vast network of experienced operators and LP investors.
We have the Operational, Technology, M&A, Business Development, and industry-specific Strategy expertise to help companies accelerate their growth and reach their full potential. Learn more about Panther Equity Group by heading over to our website:
A Trusted Partner For Founders, Companies & Entrepreneurs
📍Chart of the Week: Cloud Segment Growth
Gartner’s latest cloud services forecast projects spending to grow 21.7% to nearly $600 billion in 2023. SaaS is expected to continue dominating segment spending while cloud infrastructure (IaaS) and platform services (PaaS) are driving spending growth.
Hyperscalers are dominating cloud technology, but the business application market remains fragmented giving providers the opportunity to continue innovating their SaaS offerings.
How does Panther think through this?
Despite gloomier economic forecasts for many industries, IT, Technology Infrastructure, Cloud Solutions / Services, and Security remain top of the budget and areas the companies cannot afford to scale back on.
We share this to say — while many other sponsors are sitting on the sideline in this environment, Panther is actively working on deals and looking to close several in 2023 within the IT / Cloud & Solutions landscape.
We’re Looking For Deals 🎯
Our team is focused on making investments within the IT & Telecom Services, Technology Services, Business Services & eCommerce verticals. Along with our operating partners, we have decades of experience within the mentioned verticals paired with a vast network of experienced operators and LP investors.
Size: EBITDA of $2 million – $12 million / $10M to $100M enterprise value
Geography: U.S. or Canada headquarters
Target Transaction: Majority, significant minority, and structured equity investments
Business Profile: Founder or closely-held ownership with an experienced management team
If you’re a Founder / Shareholder interested in working with Panther, or an intermediary with a deal to share — feel free to reach out and get in touch with us! We are happy to compensate fees to intermediaries & referrals at market levels.
Private Market Movements
2023 IT M&A: Q1 Headwinds
As investors maintained hesitancy due to market headwinds, IT M&A activity proved to be quite slow during Q1 2023. Private Equity saw roughly $146.8 billion in deals announced or closed for the sector, recording deal value at its lowest levels since 2020. Continued inflationary pressures along with rising interest rates have tumbled valuations while deal-making has suffered due to broader market volatility. Many advisory firms have begun to take a more cautious approach to private investments, resulting in sharp deal count reductions over the last few quarters.
In terms of investor activity however, many PE firms have been picking up discounted public equities; shops have looked to acquire high-growth tech firms at more suitable prices. Firms such as Vista Equity Capital and Nellore Capital Management both closed acquisitions over the quarter, with buyout pricing reaching up to 46% premiums on the market closing price. In fact, take-private transactions comprised six out of the top 10 IT M&A deals during Q1 for a cumulative value of $24.2 billion. To ensure successful deal execution, dealmakers will have to develop robust IMs along with pre and post-deal value-add programs as a method to follow through with pipeline opportunities aggressively.
Software M&A activity kicks off strong in 2023
The first quarter of 2023 saw 855 software M&A deals, representing the 2nd highest Q1 besides Q1 2022, despite a looming economic backdrop, regional bank failures, and rising interest rates.
Lowering software valuation multiples, combined with software’s strong cash flow, recurring revenue streams, and capital-light model, have continued fuelling a strong deal economy despite a wider “tech pullback”. Q1 2023’s median EV/Revenue multiple of 5.2x reflects a slight discount to software’s 5.4x 10-year average and a significant discount to the 9.0x multiples seen in 2021. Data from the past few quarters show revenue multiples have stabilized between 5.0-6.0x and they’re expected to continue trending within this range.
Q1 2023 represents the first quarter-over-quarter improvement in deal activity since the tech cooldown began in Q2 2022. Looking forward, Software Equity Group predicts deal activity to remain strong and above pre-Covid19 levels for the remainder of 2023, but below record 2021/2022 levels. It’s likely that we’ll continue seeing relatively modest quarter-over-quarter gains in deal activity for the remainder of the year.
Private equity is dominating new deal activity
Private equity-driven deals are driving 2023 software M&A rather than strategics, especially in SaaS where 61.1% of deals in Q1 involved private equity acquirers. The deal landscape presents a unique opportunity as private capital dry powder remains at record highs while public strategic software acquirers cannot bid as competitively due to their own compressed stock prices. As a result of public strategic companies hoping to build stronger cash positions, they’ve de-prioritized M&A and their portion of SaaS acquisitions dropped sharply from 27.9% to 21.5% in the past quarter.
Private equity-backed strategics dominate the current deal landscape, comprising 51.5% of SaaS deals compared to just 9.7% for private equity directs. This stark contrast is due to the recent success of private equity software platform strategies, where portfolio companies rapidly acquire and integrate “bolt-on” companies that allow them to quickly realize synergies.
Industry Commentary
Telecoms M&A drops 82% year-over-year
A multitude of factors contributed to the lower total deal value in the first quarter, including the high cost of debt, the degree of industry concentration, and volatility in certain deal types, such as scale transactions. Comparing regions, the majority of global transaction value came from the Americas, with about 85% of the first quarter’s reported deal value.
MSPs
Macro: Fixed income indexes yielding over 4%, 1999-2023
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About Panther Equity Group
Panther Equity Group is a private equity sponsor seeking to provide capital, strategic support, and resources to healthy & well-positioned private companies in the lower middle market. We typically focus on companies with $2 million - $12 million in EBITDA and seek to make majority or significant minority equity investments.