Note: Updated August 2nd with coverage links from Sumeru, MDSL, Telesoft, AltAssets, AOTMP, Crunchbase, PEHub, and Pitchbook.
In case you missed the announcement, as of July 31st, Sumeru Equity Partners has acquired MDSL and is joining Telesoft with MDSL to form a single Technology Expense Management company. I had a few opinions about the new MDSL that didn’t fit into my more formal analysis because they’re observations rather than directional guidance. If you haven’t read the formal Market Milestone yet, please check it out.
First, Sumeru Equity Partners has an interesting portfolio of companies that could be accretive to the new MDSL company. Take a look at their current portfolio:
Several of these companies could be accretive to MDSL including:
In my opinion, SEP should work hard in building integrations and partnerships across these portfolio companies, as MDSL’s telecom and technology management capabilities would be potentially accretive to the management of all of these areas. In particular, Amalgam believes that MDSL and Snow Software are especially well aligned to work together in supporting IT spend management projects and that their functional roadmaps will run into each other over time as the race to support the cloud takes shape.
Second, those who read the press release of this announcement may have noticed the lack of detail. It is a bit odd to see an acquisition that brags about an “explosive growth rate,” “leads the industry in overall customer satisfaction,” and “market leading customer service” without any metrics. It doesn’t pass what I call the Drucker test based on the famous quote “If you can’t measure it, you can’t improve it.” But digging into the claims, are they true?
From an explosive growth rate perspective, technology expense management companies have been growing quickly over the past couple of years with strong executors averaging 15-20% growth. From the TEM perspective, this is explosive. But in general, TEM companies are not doubling revenue year-after-year in this space. Without exact guidance, Amalgam would recommend to readers that TEM companies talking about “explosive” growth are typically talking about growth in the 20-40% range rather than the 2x-3x meteoric growth of some funded companies. After all, TEM is a fairly mature industry that is seeing a growth phase. In addition, there has been an artificial dampening of competition over the past year as Tangoe, the market leader in this space with over $38 billion in spend under management, has been going through growing pains and did not grow revenue compared to last year. As a competitor, Amalgam would not simply assume that Tangoe will continue to have these challenges with a strong management team and after getting rid of its prior accounting baggage. Tangoe has long been the market leader both in sales and marketing in the TEM space and, after a year off, Amalgam would expect that the engine would start up again. This will create challenges for TEM companies used to riding the 20% growth rate that non-Tangoe TEM companies have had.
Another potential challenge is that MDSL would like to say that it is now the clear #2 in TEM behind only Tangoe with this acquisition. After all, who doesn’t want to be the leader? But a few companies make this assertion unclear. First, Calero, backed by Clearlake Capital, also has roughly 350 employees managing “over $3 billion” in spend and, unlike MDSL, does not support a significant non-TEM business such as market data management. Second, Cass Information Systems has an estimated 600 employees, including Cass’ Shared Services personnel, assigned to technology expense management fulfillment. And although Cass does not break out its telecom spend under management and instead provides a bucket of “energy, telecom and environmental” spend, Amalgam estimates that over 60% of the roughly $12 billion assigned to this bucket consists of telecom based on publicly available metrics. A third challenge is that there are multiple TEM vendors that have significant spend under management through carriers and partners, such as Ezwim and SaaSwedo. And finally, there is also the one giant company that is active in the TEM space, Dimension Data, which has over 150 employees assigned to TEM but does not publicly announce TEM revenue separately from the rest of its business. Because TEM companies are typically either private or do not explicitly define their TEM-specific revenue, it is hard to measure market leadership other than to know that Tangoe is at least 5x larger than its nearest competitors, there are multiple strong competitors with over a billion dollars in spend under management, and that there are also some fast-growing companies that are in the 100-500 million dollar annual spend under management range.
Third, what is “market leading customer satisfaction” in TEM? In the TEM world, satisfaction and churn metrics can vary greatly. However, Amalgam notes that multiple vendors, such as Cass, ICOMM, and Wireless Analytics, regularly report less than 2% customer churn per year. It is not uncommon for these vendors to lose no customers in any specific year or to only lose customers through M&A activity where an acquired IT department is forced to move to a competitive solution. TEM is a business where service-oriented providers often maintain 95%+ retention. Amalgam notes that both MDSL and Telesoft have strong customer service and retention records and are in line with TEM market norms, but it can be difficult to know what is actually good without reference.
This provides a starting point for my perspective on the SEP acquisition of MDSL. If you would like more details on the actual acquisition or want to learn more about Amalgam’s recommendations for MDSL and Telesoft clients, please read the Amalgam Insights Market Milestone free to the first 100 downloaders.
For Additional Perspectives, look at the following:
Press and Research Perspectives
AOTMP Heralds MDSL—Telesoft Combination as Positive: