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The New Year was barely underway when Network Depot announced the acquisition of Evolve Technologies, the managed services company built by well-known channel personality Dave Sobel. Since then, several cloud and managed services companies have announced deals in what appears to be the beginning of a merger-and-acquisitions surge.

The truth is deals announced in January were actually consummated in December, and the primary driver was taxes – as well as opportunity. The announcements came in January because December is deadly when it comes to getting any exposure for news; no one wants to compete against the holidays, which sap the audience.

Here’s the cycle: Buyers started looking for assets in the third quarter. By then, they had a pretty good sense of how they were going to end the calendar year in sales and revenue, and how much they had to spend on new business activity. The level of most of these deals is on the low end, and the MSPs making moves are essentially cash businesses. That means the initial payouts are tax deductible, and concluding deals in the fourth quarter is absolutely essential.

Are MSPs searching for synergies? Absolutely. Is the managed services market lucrative? For many businesses, it is. And can M&A deals accelerate growth? Without a doubt.

But let’s be honest, the merger of two relatively small MSPs is not going to change the world, nor does it spark a trend. If a $4 million MSP buys a $1 million MSP, the deal will pay for itself in two to three years, but it will not create a new center of gravity in the market. Deals like Best Buy acquiring MindSHIFT is more interesting than when MindSHIFT bought Alpheon last year because it signals a strategic shift in direction – a major retailer expanding its B2B services capacity.

Many MSPs and observers will point to deals like Network Depot and Evolve, Birch Communications and AstroTel, Canfield Computers and Steel Valley Computers, Internap and Voxel Holdings as signs of industry consolidation and accelerated M&A activity. Again, this is an ill-formed perception. The same level of activity was reported at the beginning of 2011 and 2010, and the driver was the same – taxes.  M&A activity is constant, especially when there are literally thousands of solution providers and MSPs in the market.

Presido buying INX to create one of the largest data center solution providers in the U.S., and FishNet buying Logic Trends to create the largest security-focused integrators are significant deals because they reflect true consolidation among a specific class of channel partner. It would take hundreds of M&A deals in the mainstream managed services market to make a dent that would lead to true consolidation.

What is true consolidation? Gartner defines industry consolidation as when the top five businesses in any particular market segment achieve 60 percent combined market share. In managed services, no one company even comes close to having a fraction of a fraction of that number.

Is M&A good for sellers? Depends on their goals. When Greg Donovan sold Alpheon to MindSHIFT last year, he was going to head up the combined company’s new health care services practice. MindSHIFT talked about how Alpheon was going to propel it into new markets, and made a commitment to the Alpheon team. Within months, though, Donovan was gone and MindSHIFT stopped talking health care.

It’s not an uncommon story. Last year several MSP entrepreneurs who sold their companies with the intent of assuming roles in the new business found themselves walking the streets. Some of these exits were planned and the initial announcements were cover. However, some MSP owners were truly surprised when they were shown the door.

As for getting rich on an MSP sale, don’t count your cash too quickly. Many of the MSPs are profitable, but not wildly profitable. The first indication of an MSP’s limited value comes during the valuation process of an M&A deal. Even when a price is struck, only a fraction of the total sale amount is actually paid. The balance is often based on “earn outs,” or payments based on the performance of the combined company. This keeps the seller engaged and insulates the buyer from bad assets.

Will there be more M&As in the MSP market in 2012? Absolutely. Will there be industry consolidation? Yes, but not at scale. And what many overlook is that every sell-out comes with a new MSP entering the market. In other words, the MSP market is dynamic, and will remain that way for the foreseeable future.

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