Any nascent industry sees the rapid pace of mergers and acquisitions go with almost reckless speed. This is true in any industry on the cutting edge where larger organizations looking to catch-up end up gobbling up small start-ups in rapid succession. Nowhere has software investment banking been more prevalent of late than in the cloud computing sector. I would not be able to list on both fingers and toes all the acquisitions that have occurred over the last several months. The questions we should be asking still remain unanswered. Is there a bubble? Are these acquisitions overpriced?
Because cloud M&A is so hot right now it almost immediately begs the question of whether or not there is a veritable bubble. I can think of at least three acquisitions made in the last several months where a very large and significant portion of the acquisition price was marked down on the financial statements as “goodwill.” Whenever a company overpays for another, it could be strategic, but when it starts to happen in rapid succession across an entire industry, it is highly indicative of a bubble. Bubbles cannot last forever as we saw with real estate a couple of years ago, but they are certainly fun to watch as mounds of money is spent on various acquisitions.
I want to answer my second question a bit differently. I recently was speaking with a friend who sold his IP and data management company for a significant sum to the only other IP management firm in the area who had slowly gobbled up all the businesses around. Now, when this friend went to sell he actually had a great deal of power in the negotiations because he held the last outpost for the other gentleman to literally “own” several hundred miles of pipe and governance. He was able to obtain maximum price for his business. A similar thing is currently happening in cloud mergers. We are seeing large entities purchase those which are smaller for strategy sake.
For instance, when EMC grossly overpaid for Isilon systems last year, they were able to justify it by putting the “big data” storage of Isilon’s technology on the back of EMC salespeople and make a boatload of money. Not all bubbles and “goodwill” indicate the market is going to crash and that we are going to go home empty handed.
The rate of acquisitions for the cloud will continue to go on for the next couple of years as larger companies like Amazon, Google and SalesForce continue to acquire competing firms. However, the rate of growth may slow as the hot market starts to cool.