Cloud secrets – A view from the Valley on Tech M&A
May 08, 2015
Cloud is the most significant architectural shift in the history of computing. Unsurprisingly, its impact is being felt across the IT industry value chain and has very real and short term implications for European tech companies. We recently hosted a breakfast seminar with our Silicon Valley technology thought leader, Bo Parker, to discuss what this means for the industry and mergers and acquisitions (M&A) and thought we would share some of our thinking.
A story of consolidation and disruption
Companies (Enterprise and SME) are moving their workloads to both public and private cloud, the latter being crucial to the European data centre and managed services market. Scale economies are important and we are seeing consolidation in private data centres, but can private cloud ultimately compete with the much greater scale economies of public cloud? Amazon Web Services (AWS) is introducing more capacity each day than the totality of infrastructure they used to run their business in 2008 when AWS was first launched.
Cloud computing is redefining the network boundary and topology, driving strong demand for cyber security products and services. Legacy networking vendors continue to acquire security specialists and there has been consolidation in security products distribution and services which appears set to continue.
At the application layer, we’re seeing legacy applications running in virtual machines in private clouds, providing some incremental benefits in terms of performance and cost. However, these benefits are generally small in comparison to what software as a service (SaaS) applications deliver. Companies are increasingly willing to trade-off flexibility for near instant deployment, reduced cost and the improved connectivity that SaaS applications provide.
Crystal ball gazing…
So, what does the future hold? Well, the use of legacy data centres will likely transition to hybrid infrastructure comprising legacy data centres, private clouds, public clouds and SaaS applications.
This transition will have a very significant impact on the industry value chain:
- Vendors: Will need direct (SaaS or software defined) customer propositions or risk being disintermediated by public and private cloud providers
- Distributors: Will need to reinvent themselves for a service-centric value chain with diminishing product volumes
- Resellers/Integrators: Will also see reducing product sales and will have to adapt their service offering to be more oriented to cloud integration
We expect these trends to drive M&A activity in Europe in 2015 in the following areas:
- Cyber security
- Data centres
- Vertically focussed software
- Enterprise resource planning (ERP)/accounting software
What’s driving high valuations?
Ultimately, valuations still come down to some basic fundamentals around expected growth, a company’s ability to successfully implement its growth strategies, and the size of its potential market (i.e., only UK, pan-Europe, or worldwide). For now, smaller, earlier-stage companies are being measured and valued based more on overall growth in turnover rather than profitable growth.
So put simply, relative to their respective revenues, these much smaller and much younger companies making headline news are really achieving much higher valuations relative to the larger, older technology companies due in large part to growth expectations. Mind you, all the bellwether tech companies have been profitable for many years and generate billions in turnover which can’t be said at all at the younger end of the spectrum.
What does the future look like for valuations in tech?
We’re at a time of disruption in how consumers and businesses operate every day. Consumer devices are becoming ever more connected and are learning more and more about our behaviours, likes, and dislikes whether we’re at work, at home, or in our cars. Ecosystems are being established, standards are still being set, and there are more than enough companies vying for a piece of this evolution flush with cash that have made some big bets or are in a land grab to secure time to market advantages. These factors, among others, mean the strategic need for dominance or to be relevant given the magnitude of change occurring now and in the future will continue to drive high valuations for companies in the hottest spaces in the near-term.
What do you see as the hot areas for the technology sector in the next 12-24 months? How will you respond to the potential disruption? Share your thoughts below or schedule a meeting to discuss your challenges in confidence.
Carol Lee | Valuations – Technology, Media and Telecommunications
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