UComms – how to ride the coming deal wave

Armstrong anticipates a wave of transactions in the UComms sector in the next 6 months as the first wave of PE investments from 2013-15 hit their exit window. Despite solid fundamentals, the marketplace has changed and there will be different investment considerations this time round.

Is a mid-market roll-up strategy still viable? After 5 years of PE backed buy and build activity, fewer obvious roll-up targets of scale are available and valuation expectations are high. The next round of PE investors will need to redouble efforts to source targets off-market, and will need to think carefully about the complementarity of their service mix and vendor coverage.

How is market maturation and customer inertia impacting the organic growth opportunity?

UComms is well into the late mainstream adopter phase of the maturity curve and clients are sticky. Whilst a sticky client base is an attractive feature of the UComms model, the counterpoint is that ‘brownfield’ organic growth is challenging. Furthermore, many companies who have not yet adopted UComms are satisfied with their current ‘good enough’ solution and are unwilling to commit to a major change.

What factors will drive organic growth in the next five years?

  • Does UCaaS (Unified Comms as a Service) offer functionality and pricing that are more attractive to the SMEs; those on ISDN/PSTN who have been reluctant to switch; and an upgrade path for on-prem UComms users?

  • There is an increasing demand for flexibility in location and devices, and for a converged communication approach for the workforce, can this continue to drive UComms adoption?

  • How do UComms providers best exploit the 2025 UK ISDN network switch-off?

What will be the impact of big software vendors, especially Microsoft? Microsoft have backed UComms functionality into Teams and have a huge access advantage to the core customers through the ubiquity of Office 365. Does this offer an opportunity for UComms incumbents to expand their service offering, or a create an threat that IT managed service providers can build share? Slack, Zoom and Amazon are also well positioned to make a significant play in the market, as are US based UCaaS specialists like RingCental and 8x8. Armstrong’s view The big question is whether the market can bear another cycle of mid-market PE investments:

  • A likely scenario is the merger of two or more of the larger players coming to market over the coming months, with the aim to build sufficient scale to open up an IPO exit route.

  • Given lofty valuation expectations, how does the lower mid-market find opportunities for value creation?

To discuss the forthcoming wave of UComms investment opportunities, please contact Mike Callow, Head of Technology, mcallow@armstrong-ts.com or +44 7894 594 500