This article is written by Aditya Kasiraman, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
The adoption of cloud computing has been a driving force for investment and M&A work across technology and the software world for more than two decades. Investor activity in cloud start-ups has only accelerated in the last six months following the global epidemic, as regional closures force people to work from home and firms that need to transform their IT infrastructure, move towards increased storage and process workloads in the cloud infrastructure to support their operations.
There will be a significant increase in investment, which will lead to future contract work in space in the coming year. The key trends that drive this investment are:
- Digital conversion;
- integration of cloud management and service management; and
- increased investment in cloud management ‘stacks’.
While the general principle of M&A advises on “conversion, then modification,” cloud-based Enterprise Resource Planning (ERP) technology gives managers new options to have their cake and eat it too. Cloud technology now offers managers the opportunity to simultaneously transform not only their cost structure but also their power by changing aging, powerful technologies through flexible operating systems, based on enrollment that can go up or down as business is needed, and access to advanced cloud-based skills established upon best practice.
The road to digital transformation
As mentioned above, the increased adoption of cloud services was apparently established prior to the epidemic, but recent events have only accelerated the company’s digital transformation plans. In the second quarter of 2020, organizations around the world spent US$ 34.6 billion on cloud services, up about 11% from the previous quarter. Satya Nadella, CEO of Microsoft, recently said “We’ve seen a two-year digital transition in two months.” With the majority of the global workforce working far away, and with some businesses looking at this permanently, digital transformation looks set to continue at a rapid pace.
In addition, the practice of digital transformation has brought with it challenges that have pushed the work of contract into the cloud services system. The white-collar industry is facing IT challenges security risks, and operational challenges – all of which come with multiple providers and advisors to support them. Many businesses are also taking the opportunity to completely upgrade their internal technology infrastructure with awesome cloud infrastructure – adding more transaction opportunities to the global cloud services space.
Cloud-based services – growth and integration
The global services market is expected to reach more than US$ 200 billion in size by the end of 2020 and in the next few years, revenue will increase to more than US$ 300 billion. These statistics show that managed service providers continue to play an important role in businesses managing their IT infrastructure – a practice we believe will continue as cloud adoption and increasing automation in IT environments continue.
The industry has proven to be extremely resilient during the Covid-19 epidemic due to the critical situation of holding and managing the services of companies operating remotely. We’ve spoken to CEOs of suppliers in many areas, and there’s a consistent picture emerging: while many providers have seen challenges surrounding new customer success, existing customers tend to increase their service offerings, driven by more responsibility to the cloud and supporting home operations.
Therefore, companies that provide integrated and transparent services are leading the market, by addressing the skill gaps their customers face in reducing cloud technology, and by using service delivery technology to make them more efficient. Historically, the performance management of a company’s IT infrastructure (e.g., servers, storage, network, power, and physical security) has been a key role for managed service providers. We are now seeing a shift to cloud computing which means that MSPs need a hybrid cloud strategy to support their IT clients’ needs in addition to traditional service delivery, driving revenue growth. To capture the growing share of their customers, value can be generated by increasing service delivery in areas such as network connectivity, integrated communications, and cybersecurity. This may be done systematically or frequently, with the detection of synergetic bolt-on acquisitions.
This opportunity to create value is attractive and continues to attract, a powerful investment from private equity. In an area where there are strong scale benefits and an attractive partnership for mergers, we believe that M&A activity will increase over the next 18 months. This is likely to happen in domestic markets and across borders, especially between the UK and the US. Unlike many other disciplines within technology and software, there are few tactical consoles here, which can create a unique opportunity for private equity to provide funding to create combinations and build future winners.
Senior IT consultants and consulting businesses will be looking forward to gaining the ability to host and manage services in a specific chunk, providing their customers with more cloud-based strategies. The discovery of NTT Capside, a Spanish-based Azure Expert service provider, and more recently, the acquisition of New Signature by Cognizant in July, illustrates this point – the acquisition enhances Cognizant’s hyper-scale cloud counseling services, and will help in building a dedicated business, focused on Microsoft’s cloud solutions.
Investment is growing
Although the cloud services industry is largely dominated by major cloud service providers (AWS, Microsoft, Google, Salesforce, and IBM), we have seen an increase in investment in cloud management technology stacks, as IT business vendors view procurement as a key strategy in their cloud-based race. Proxy dealings include:
- NetApp’s acquisition of Spot.io;
- IBM’s acquisition of Red Hat;
- VMware’s acquisition of Saltstack and Cloudhealth;
- Splunk’s acquisition of SignalFx.
In addition to large ‘conversion’ deals like the ones mentioned above, we also saw a significant amount of bolt-on transactions that meet certain operational requirements in terms of cloud management. As business acceptance of cloud services continues to accelerate, we expect to see cloud-related acquisition activity by enterprise IT vendors increase.
Mergers and acquisitions love the cloud
Today’s competitive business environment pushes companies to focus on core strengths and lucrative activities. Managers continue to view divestiture as a way to get rid of ineffective or underlying assets.
Between focusing on segregation, it is often not possible to upgrade all the infrastructure needed to fund a new organization, and it is common to install Transition Service Agreements (TSA) where the seller provides post-transaction, operational services, or customer support temporarily after the transaction is closed. As TSAs often impose heavy fines on non-compliance with the agreement before the agreed date, there can be significant pressure on both parties to withdraw immediately and have little impact on the business. This can be a challenge, however, if the TSA provides services to support a traditional, in-house, or ERP system, due to difficulties involved in setting up the ERP system.
Moving to a cloud-based ERP system can help transform the potential M&A breaker into a contractor. Choosing a cloud ERP solution can be a practical, inexpensive alternative to traditional architecture or hosted solutions and should appeal to both retailers and consumers. Since it does not require hardware and configuration claims, a medium-sized company can remain operating on cloud-based ERP for four to seven months and a large multinational company about twice that time – both faster than traditional architectural solutions – thus making it easier to get out of the TSA.
Considering that the ERP cloud offers standard improvements, user rating capabilities, easy system optimization, state-of-the-art security, and increased system capabilities, it can provide the ultimate flexibility during asset transfer.
How cloud-based technology facilitates the mergers and acquisitions process?
In today’s data-driven world, merging or absorbing another company can be seen as oppressive, to say the least. Fortunately, cloud-based technology makes it easier than ever to integrate the infrastructure of two or more companies. It offers a number of benefits that allow companies to improve their operations, even in the middle of a merger or acquisition.
- Technology provides options to companies that undergo a merger: Today’s technology allows business owners to decide how they want to integrate their data, systems, operations, and infrastructure. For example, when a company acquires another organization, it may choose to leave its infrastructure completely independent of its acquisition and simply establish a connection between it. On the other hand, it can decide to move both infrastructures to the cloud. Finally, in some cases, the purchasing company may want to move only one company to the cloud, and then integrate that service into the existing infrastructure. The availability of these options allows companies to decide which type of integration will best suit their needs for both current and future needs.
- Cloud-based technologies make integration faster: When it comes to integration, it is important to integrate quickly. Among the most important things you can use right now are email domains, directory services, mailing lists, calendar sharing, and more. These factors can determine how well a company performs following a merger or acquisition. Cloud technology allows this information to be transmitted to all users seamlessly, meaning that all stakeholders and employees associated with the company will have access to up-to-date information in real-time.
- Cloud-based technologies improve flexibility: Mergers and acquisitions show growth, which means it is necessary to measure software programs. For example, a company with 500 people using a particular type of software may suddenly double, meaning that the software will need to be used quickly and effectively for new employees. Cloud technology makes distribution easier and less painful. Purchasing companies can increase their cloud-based subscriptions on the fly to match their current number of users. With access to subscription-based cloud services, sharing information with employees and stakeholders becomes an easy process. It gives everyone access to the information they need to keep the company running smoothly, avoiding downtime and interruptions.
- Cloud-based technology nullifies the need to worry about hardware and applications: In traditional integration, non-cloud merger, and acquisition, you have to consider a variety of factors – especially when it comes to hardware and software applications. For example, if you double your company’s revenue by acquisition, you may find yourself thinking about duplicating your server’s power. With cloud technology, this is just not necessary. You can easily scale and expand applications in the cloud using computer services like Microsoft Azure. You only need to create a system to complete the integration and can then go ahead. This allows you to focus on the most important business activities.
Cloud technology provides companies with a faster distribution of services, software, and empowers employees – current and newly acquired – with the information and tools they need to find tools post-acquisition. It solves concerns about the servers and applications around them because they are easily accessible in the cloud. Ultimately, it allows everyone to access the right information in real-time, which keeps your company running, even during the implementation phase.
4 reasons cloud assists integration
According to various studies, the rate of failure of long-term consolidation deals is between 70 and 90 percent. Given this figure, companies should be extremely confident in their ability to beat the practice.
Of course, not all M&A deals are made equal, and not all have the same chance of success. Basically, businesses that use cloud computing technology such as Amazon Web Services and Microsoft Azure are more likely to have a successful integration.
Über-mergers will focus on businesses for the next three to five years. Global 2000 wants to use its stock price as capital to make a major acquisition that will take them to the next level. Unfortunately, many of these purchases may not work as planned. It is difficult to integrate IT systems for both companies, and collaboration can take years, not months to achieve. Both customers and investors may be hampered by progress, and the company often pays the price for the expected failure. Cloud-based resources can be shared as needed, and cloud-based community programs can easily and efficiently play with each other.
The time it takes to integrate systems to support acquisitions varies, depending on the type of companies involved. However, the basic capabilities of cloud computing include:
- Ability to exchange data within the cloud. It’s fast and easy because cloud providers use databases of the same cloud environment, middleware, and database ops solutions. Traditional methods of inter-data center integration have a major problem, and they often take more time and money compared to other computer-based methods.
- Ability to integrate security systems together using a standard platform. Where a traditional cloud protection system exists in the same public cloud provider, it is simply a matter of integrating the directory services, and thus the ownership and access management solutions. Security can be synced within weeks. The integration of traditional heritage security can take up to a year, excluding planning.
- The ability to deal with common data semantics. With the same customer, innovation, product, ideas, etc. there is no misunderstanding of which data is the only true source among affiliated companies. This requires some understanding of metadata, and perhaps even common MDM solutions. The public cloud also provides a common working platform for all of these integration efforts. There are more benefits to M&A in the cloud than can be written here. You will find that it is a matter of understanding where your business is, where the company you want to find is, and the potential use of a public cloud platform as a point of integration between both IT systems.
Here are 4 reasons why cloud and M&A should go hand in hand.
- Easy integration: Integrating your IT environments with infrastructure can be a major challenge during an M&A agreement, and is one of the key factors in a successful transaction. 71 percent of US companies agree that technology integration determines the outcome of an M&A agreement. The good news is that integrating IT is much easier when you are already in the cloud. For example, virtual private networks (VPNs) can be integrated into a single account, explore existing cloud networks, or can be layered into a parent company and a child company account.
Currently, Azure Blob storage and AWS Simple Storage Service (S3) are public cloud offerings that allow users to transfer files and photos stored between companies hosting various cloud services. In addition, the company’s central storage or data repositories can be easily backed up and returned to the premises for integration planning.
In addition, there are often difficult decisions to make about storage platforms and analytics when planning large-scale IT integration. With the cloud, you can expand your data pools once the M&A agreement is over, and decide which final platforms and statistics are best for the company going forward.
Thanks to cloud computing, startup teams are no longer restricted geographically in some areas where the systems of various companies are integrated during the M&A agreement.
- Easy cooperation: When two companies become one, it is important to find both on the same page as soon as possible. However, aligning your goals with your work ethic is much easier said than done. One of the great benefits of cloud computing is the ability to access resources from anywhere, anytime with just an internet connection. During the M&A agreement, potential partners can use the cloud to start sharing and collaborating very quickly. Access to VPNs, data sets, analytics, and reporting systems can be done quickly, providing companies with valuable research and understanding even before the papers are linked.
- Immediate elimination: An M&A agreement can take many years to complete – it is understandable when two highly complex companies merge into one organization. In order to have a good chance of success, you need to go through all the usual processes: decide on a growth strategy, make the right effort in both financial situations, plan integration, get approval, and finally execute it. However, the longer the agreement takes, the greater the risk and greater the likelihood that it will be terminated. In addition, unfinished deals do not deliver value to companies or stakeholders. Fortunately, cloud computing can help significantly reduce the M&A contract time from negotiations to performance. The benefits of the cloud such as transfers, transparency, and access to critical assets between companies all help M&A partners move faster and make fewer mistakes along the way.
- High probability of acquisition: The cloud can also be an important part of the M&A negotiation process, helping potential buyers to separate the wheat from the chaff. For example, startups can use the cloud to show exactly how their products and services will add value, providing demonstrations and proof of concept. In general, your company strongly urges you to find out when your data and analytics are hosted in the cloud. This is because business lines run smoothly in that direction. According to IT research and analysis company Gartner, by 2020 more than half of the new business intelligence and analytics licenses for new businesses will be cloud-based products. Being in the cloud before the M&A agreement not only gives startups the benefits listed above, it also saves the M&A partner from worrying about a time-consuming cloud navigation project.
Cloud computing provides the critical infrastructure for today’s business applications and consumer applications – its acquisition is integrated into almost any type of digital service used today. The sector has attracted billions of dollars in investment and will continue to do so. The recent epidemic only accelerates digital transformation programs for all types of organizations around the world, which deliver an ever-increasing amount of workload to the cloud, whether public, private, or hybrid.
Cloud computing removes many common IT pathways for effective integration and acquisition. Moving from the traditional premises to a cloud-based solution before or during the merger will greatly improve the chances of success in an already challenging M&A scenario.
As such, the themes that were already clear in space have been expanded, creating an attractive environment for continued investment and corporate activities. The benefits of scale and the availability of partnerships are likely to further strengthen the sector, especially PE-backed assets, and provide PE owners with an attractive route to cash flow. So, next year we can expect to see a continuous high deal volume with composites that reflect profile growth, Capex light vs heavy business model, and market trends.
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