One topic that keeps reoccurring in my various conversations is the sudden interest in cloud centric M&A activities thanks in part to the recent IBM / Sun rumors. Being that I continuously find myself in the midst of a lot of the back room, off the record type conversations I thought I'd share some of my recent insights into cloud m&a.
Without going into detail, lately for one reason or another I have become aware that several of the largest names in technology have put together "cloud M&A teams" focused on buying up both established cloud related companies as well as some of the latest crop of cloud startups. What is clear in these acquisition discussions is the traditional models applied to M&A don't work in the current economy and is specially true in cloud computing.
Along with the financial crisis, we are facing what I can only describe as a technological crisis of identity. Suddenly every tech company worth it's salt is claiming to be a cloud company or has a cloud computing strategy of some sort similar to the late nineties where every company suddenly had a web strategy. For most of the established tech companies this means buying your way into this technology revolution. Also interesting is a lot of these companies are sitting on significant cash stockpiles. The problem is there are not nearly enough solid revenue generating cloud computing companies to match the demand and hype surrounding the cloud sector which has caused some very interesting side effects.
One of those is the rise of the mini-acquisition, which I would describe as buying a company consisting of a couple guys with a good idea or a rough "beta". For me this seems like a glorified hire with signing bonus. Another is the R&D acquisition, basically it's easier to buy a venture funded company which is light on customers but strong on technology then build it yourself. In the case of a VC backed company it's certainly easier to value the startup since in a sense the VC's have already set the value. But this leaves the independent boot strappers in a interesting spot. This group are in a great position because they don't have to worry about paying back their venture investors and have been operating successfully for sometime. A 10 or 20 million dollar exit goes a lot further with a bootstrapped startup then a 60 million dollar exit with a VC backed startup.
From what I can see, the current cloud M&A market is focused on the fact the we're in the midst of a seismic shift in the IT world, one that the larger players are having trouble adapting to. No longer do you have to be a Microsoft or Google spending billions on infrastructure to gain significant market share, just look to Twitter or the dozens of successful startups using Amazon Web Services. What's more, the balance of power has shifted, a couple guys with a good idea can now influence the direction of major corporations thanks to the emergence of social web technologies. Ideas have become among the most valuable assets you can have.
In the coming weeks your going to hear about a variety of M&A deals. I think you will be surprised to see that these deals are not based on booked revenue or other "traditional" metrics but rather market influence and speed to market. What is clear is cloud computing has less to do with pay-per-use, on demand, outsourced infrastructure and more to do with a term that has in a very general sense come to define the next generation of computing.