‘The market is still kind of slowing down [but] the number of deals is still better than before the pandemic, so it’s not the end of the world,’ says John Holland, managing director of Corporate Finance Associates.

Due in large part to high interest rates, IT services M&A transactions and the aggregate value of those transactions were down across the board in the first quarter of 2024.

“The market is still kind of slowing down [but] the number of deals is still better than before the pandemic, so it’s not the end of the world,” said John Holland, managing director of Corporate Finance Associates, told CRN. “The market definitely is slowing down and the Federal Reserve announced that they’re going to slow down. They were planning to cut interest rates three times this year and they’ve changed that. So maybe it’ll be one time because inflation is a little hotter, and that that will tend to slow things down.”

Earlier this month, the Associated Press reported that the Federal Reserve doesn’t plan to cut interest rates until it has “greater confidence” that price increases slow to its 2 percent target.

Laguna Hills, Calif.-based Corporate Finance Associates is an investment banking firm with decades of experience in executing mergers and acquisitions in the IT and telecom services industries.

According to Holland’s quarterly M&A report in the IT services industry, the number of IT services M&A transactions fell by 20 percent from Q1 2023 to Q1 2024 and 22 percent from Q4 2023 to Q1 2024. The aggregate value of IT services M&A transactions for publicly traded firms by fell 44 percent from Q1 2023 to Q1 2024 and 69 percent from Q4 2023 to Q1 2024.

While some PE firms Holland said are “very healthy” and will continue to acquire, higher interest rates make it “very challenging” for private equity firms and IT service companies to make acquisitions.

One such IT services company, C1, filed for Chapter 11 bankruptcy protection in April.

“They attribute the bankruptcy filing to the high debt load and high interest rate,” he said. “So that suggests that high interest rates are taking their toll on some of these companies that are owned by private equity.

“The good news, eventually the interest rates will go down,” he added. “The bad news is it’s not going to happen very quickly.”

Despite the M&A slowdown, some sectors – including cybersecurity and cloud — are thriving when it comes to deals. “These companies that do Microsoft Azure solutions and AWS cloud solutions, they’re really hot and there’s a lot of companies that are trying to hunt those companies down,” Holland said.

And as recurring revenue is the secret to an attractive M&A deal, Holland also sees a rise in U.S. government solution provider acquisitions.

“For the last few quarters, there’s been a lot of activity with the U.S. government resellers of all types: data analytics, cybersecurity and VARs,” he said. “I think that acquirers find U.S. government solution providers attractive because it’s less risky. It’s resistant to recessions.”

One company he continues to watch is Chicago-based IT services firm Ahead. In February, Ahead bought New York City-based IT services firm Computer Design & Integration (CDI) to expand its international presence, creating a $3.7 billion global company.

“They came out of nowhere about three years ago,” he said. “They acquired one company and then another and then another and are now really substantial. It’s an interesting company to watch and I think they’re going to continue to be acquisitive. It’s impressive what they’ve done so quickly to scale up that business through acquisition.”

And while the number of acquisitions is down in the first quarter, Holland argued to not count anything out.

“I think that there will still be healthy volume of M&A for the rest of the year in IT services in general, especially in the MSP space,” he said. “But there’s a good chance that things could continue to slow down for the rest of the year, because interest rates are elevated. It doesn’t look like they’re going to go down anytime soon.”