Everything you need to know about SolarWinds' plan to spin out MSP division

Today SolarWinds revealed that it is exploring a potential spin out of its MSP business into a new standalone company.

In a call with investors, CEO Kevin Thompson broke down why a spin-out could benefit both its core IT management business as well as its MSP arm.

Channel Partner Insight lays out everything you need to know about the rational behind the move, and what MSP customers could expect from an independent SolarWinds MSP.

SolarWinds MSP to become an M&A engine as a standalone company

Thompson told investors that SolarWinds MSP will be able to pursue an aggressive M&A strategy as a newly independent business.

As part of the larger SolarWinds business, Thompson said that its MSP business often missed out on pursuing M&A opportunities because management sometimes prioritised resources in favour of its core IT management business.

The MSP business has been constrained through being part of the larger SolarWinds company, claims Thompson. He explained that the MSP business would usually target smaller businesses with as little as $5m in annual revenues for M&A targets, and would usually get pushed to one side.

"Because any acquisition whether it is $5m in revenue or $50m in revenue requires a lot of effort, and size really only adds 15-20 per cent to the integration effort. So when you're a $1bn revenue company, you don't spend time buying $3m and $5m or maybe $10m revenue streams.

"But for a business doing $300m in revenue [SolarWinds MSP], if that technology is strategic then you absolutely can and should do that," he said.

SolarWinds MSP would have the ability to invest in growing its global sales force, claims Thompson, as well as invest in R&D to bring new technologies to its MSP customers at a faster rate.

"We believe there's a great number of technology-based services we can deliver to MSPs that we're not delivering today. And in order to deliver more services, we need to build them and we need to acquire them," he said.

"So on the development side we can build brand-new products and invest more in that and we can bring more technology to market on an annual basis which will allow us to increase the revenue stream we are getting from MSP partners.

Through these growth initiatives, Thompson believes SolarWinds MSP could be hitting more than 20 per cent revenue growth in the long term if it becomes a standalone company.

"[After a spin-out] the management will have a number one priority to grow that business and it won't be a matter of sharing resources across a larger business. That's really the number one advantage we would get."

Shared functions will split as part of the spin-off

Spinning out the MSP business will mean SolarWinds will have to split some of its existing shared functions.

Staff across shared functions including finance, legal and marketing will move across to the MSP business if it is successfully spun out.

"On the MSP side of the business, we will definitely have to move some of those team members in the shared operations into that business, so some of those team members will end up in the core IT management business," said Thompson.

Hitting the magic 'Rule of 50'

SolarWinds MSP will be more likely to achieve the so-called "Rule of 50" if it spins out of the core business, claims Thompson.

The Rule of 50 is often used by software companies to measure their success. The rule adds together a company's percentage of annual revenue growth and its EBITDA as a percentage of revenue. If this number comes out at 50 or higher, a business is performing well.

SolarWinds claims that its core IT management business is well above the Rule of 50 rule, and shedding the MSP division will help the firm to safeguard its profit margins from its core business.

The MSP division is currently operating at below the "Rule of 50" level, claims Thompson, but claims that it could reach the major milestone if the spin-out goes ahead.

"The business can focus primarily on reinvesting profits to provide long-term growth. We are early in our planning, but based on the long-term growth opportunities and the operating leverage we have built into our MSP business, we think this business could run at a level approaching the rule of 50 as a standalone company," he said.

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