December 12, 2011

Head In the Clouds

Ash Sethi – Analyst, MergerTech Advisors

When cloud technology first emerged, it seemed a service platform best suited for newly-founded businesses and SME’s who either lack their own IT infrastructure or have large fixed IT costs and unutilized capacity that could be converted into smaller variable costs.  Yet Dimension Data, CA, Google, Microsoft,  IBM, Verizon, Time Warner, and HP deployed over $20 billion in 2011 on cloud acquisitions alone.

It turns out that few sectors have been keener to leverage clouds disruptive model than large IT conglomerates and BI firms, many of whom are developing their own bespoke private clouds that require greater customization, tighter integration, and more robust security protocols.  These companies have discovered it is often more economical and efficient to simply acquire cloud infrastructure rather than divert from core competencies and develop the technology in house.  What has followed is nothing short of a race to get financial weight behind rapidly growing small and mid-market companies.  Some of 2011s largest VC investments, such a $129 million Series D round in, have been in cloud content management.

Many initial skeptics of cloud computing stipulated that cloud technologies could reduce fixed costs such as equipment, personnel, maintenance, licensing, and power consumption, though they vociferously disputed just how much in often colorful editorials and speeches.  Yet they and many others did not realize that cloud services companies do not merely store data and outsource IT operations: They develop competency in being able to deliver software and services via the web regardless of the end user’s location, creating an entirely new product that can be monetized and easily managed.

With cloud acquisitions heading into 2012 with such strong momentum, cloud’s adoption curve and true disruptive potential are still taking shape. The United States Federal government, including the powerful Office of Management and Budget has made development of cloud initiatives its top priority. IT services providers have developing security protocols and acquiring IT security providers in order to obtain FISMA certification as they compete for a piece of the $20 billion in potential annual government cloud spend.

2012 looks set for an even wilder M&A ride, as the rapid evolution and adoption of cloud services will bolster existing deal flow as telecom and mobility players in particular battle for position and become more proactive in broadening their product offerings.