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The wave of M&A activity swelling the cloud services sector won’t stop with the software-as-a-service (SaaS) arena. Internap’s (s inap) planned $30 million purchase of Voxel, announced early this week, signals a land rush for cloud services, beyond SaaS, several experts said.
Nearly everyone agrees that smaller, capable cloud services providers — companies like Bluelock, Cloud Sigma, and Virtustream, make attractive acquisition targets as legacy IT companies, larger cloud service providers, and even IT channel companies look to bulk up their offerings.
“There’s tons of consolidation coming because this is a big boy’s game,” said Andres Rodriguez, CEO of Nasuni, a cloud storage management company. “Look at the storage piece, it’s like the hard drive business. How many hard drive makers are there? Not many. For the same reason, those [few companies] with economies of scale survive.” (Nasuni works with all the cloud storage providers so he’s pretty agnostic on this point.)
Companies like Rackspace(s rax) or Internap, are in the traditional hosting business have lots of server capacity but may need more of the software intelligence that a smaller player can bring them. We’ve already witnessed traditional tech players — Hewlett-Packard (s hpq), Oracle (s ORCL), IBM (s IBM) and others — buy their way into more cloud services. Now watch for some of their channel partners to jump in as well.
That means companies that distribute or resell high-tech gear — companies like CDW (s cdwc) and Staples (s spls) — will enter the bidding war if they haven’t already, said Marty Wolf, president and founder of Martin Wolf M&A Advisors, a company that consults on M&A strategies.
Wolf agreed that cloud services represent “the ultimate game of scale” and that more traditional IT players will keep investing to up their ability to compete in that arena. But there’s another trend at work here as more small and medium businesses (SMBs) decide there’s no reason to keep buying servers and storage when they can outsource all that to the cloud. Many IT incumbents remain ill-equipped to deal with this class of business customers.
“It’s one thing for EDS to outsource stuff for Kraft. They get that. But these big [IT] service companies aren’t good dealing with smaller businesses,” Wolf said. (EDS or Electronic Data Systems was the giant services company HP bought a few years back.)
That means that the tech resellers — or anyone with customer relationships with these SMBs — will buy up cloud services so they can keep those customers in the fold, Wolf said.
There is a potential dark side to all this action, Rodriguez warned. The cloud services companies that don’t get acquired and don’t scale “could be in a death spiral,” he said.