Private Equity: Here’s How to Find the Best Cloud Service Provider M&A Targets

FOCUS Investment Banking’s Technology Services Team recently a predictive custom scoring of the top 1,138 managed service provider M&A targets for private equity investors. FOCUS has now applied that same methodology to the Cloud Service Provider (CSP) market.

FOCUS believes its research will shine a well-deserving light on CSP founders and CEOs—and their respective teams—and make it easier for them to access private equity capital to fuel even more growth. This is especially true for some of the hottest CSPs that are managing and driving recurring revenue (for example, Azure Consumed Revenue), those that have obtained coveted status (such as Azure Expert MSP or AWS Premier), or have recurring revenue around backup and disaster recovery in the cloud.

Why CSP values are holding up

While the public market has seen a sharp drop in the share prices of some cloud companies, such as Snowflake and Twilio, MSPs—and particularly those that provide cloud-related professional services—continue to defy the downtrend and add value through M&A, for both parties in the transaction.

CSPs are benefitting from the fact that companies remain focused on reducing their costs. By further outsourcing more of their IT, including cloud services, to outside providers, they can leverage their economies of scale and expertise for less money. Cloud migrations and the outsourcing of IT and other services is crucial as businesses strive to increase internal efficiencies to boost valuations and profitability. A tried-and-true formula that keeps working even in uncertain times is for firms to commit to their missions while allocating resources to enhance the customer experience. As long as MSPs and CSPs continue to deliver outstanding service and returns and are seen favorably by investors, private capital is still in plentiful supply.

A recent Wall Street Journal article noted that the recent volatility in the public market is actually “pushing” corporate chief information officers to “increase cloud spending” this year. “Economic headwinds [will] prompt IT chiefs to focus their budgets on subscription-based cloud software and services,” the article said. While overall IT spending is expected to grow by 3% this year, spending on software is projected to increase by nearly 10% while outlays by cloud providers on new servers is forecast to grow 16.6%, according to Gartner Inc.

“Capital is abundant as cloud services continues to show impressive returns and remains an attractive target for investment as a whole,” said Stan Gowisnock, Managing Director and Technology Services Team Leader at FOCUS. “As corporations are looking to improve internal efficiencies to bolster valuations and profitability, outsourcing of IT and other teams remains paramount.  Committed missions of corporations, with capital directed to improve customer experience, is a long-standing formula that continues to work even in uncertain times.”

What CSPs do

CSPs are heavily involved in lots of areas, including: cloud strategy, design, implementation, migration (applications, platforms and workloads), building data lakes for data scientists and data warehouses for business analytics, artificial intelligence, machine learning, modern workplace, automation (DevOps), security and ongoing managed services. They mostly partner with the following big cloud companies to offer cloud-based infrastructure or storage services from:

• Amazon Web Services (AWS)
• Microsoft Azure
• Google Cloud Platform (GCP)
• Oracle Cloud Infrastructure (OCI)

They tend to offer various “as a service” offerings, including:

• Platform as a Service (PaaS)
• Software as a Service (SaaS)
• Infrastructure as a Service (IaaS)
• Disaster Recovery as a Service (DRaaS)
• Backup as a Service (BaaS)
• Containers as a Service (CaaS)
• Functions as a Service (FaaS)
• Security Operations Center (SOC) as a Service (SOCaaS)

The FOCUS CSP algorithm

FOCUS’s proprietary algorithm takes into account over 40 datapoints to help determine each company’s score, including growth intent (percent change of new job postings on LinkedIn, Indeed and Glassdoor); employee count (12 months percentage growth rate); and web traffic (12 months Alexa rank percentage change). This allows us to quickly dig deep into factors such as emerging specialties, growth rates, and technical differentiation, and then rank order the top companies for M&A.

Ultimately, our custom scoring system ends up being a great way to prioritize and differentiate many of the best buy and sell candidates. It’s also helpful to further leverage our technical expertise, especially for technical services, MSPs and the cloud market. We bring technical cloud expertise and combine it with FOCUS’s more than three decades of experience for the benefit of our clients.

Announcing the CSP “Unicorns” for 2022

Today we are announcing the “Second 50” Ranking of CSPs for 2022. FOCUS believes these CSP “M&A Unicorns” will provide outsized returns to CSP founders and CEOs and their private equity investors. The onus is on these companies to differentiate and position themselves for growth by conceiving “new school” approaches to help their clients find and create exceptional assets—and close deals.

It’s clear our algorithm works: Across the 800+ CSPs we track, many of them are quite active in M&A activity. In fact, the number 51 ranked CSP on the list below, Hanu Software Solutions, was acquired while writing this story.

CSP Market Maker Unicorns – “Second 50”

If you’re looking for the Top 50 unicorns, that list has been reserved for new FOCUS buy-side clients who are seeking:

• New Cloud Platforms in the $2.5 million-$20.0 million EBITDA Range, and
• Add-on Acquisitions in the $500,000-$10.0 million EBITDA Range

About the FOCUS Technology Services Team

The FOCUS technology services team is a dedicated group of managing directors and support staff. The team originated and advised on technology transactions with 47 parties in the past 2.5 years alone, and served as advisor to nine technology service platforms that received their first private equity investment. 

Our practice concentrates on providing three highly-tailored investment banking services to emerging middle market and larger organizations in the Technology Services industries:

• Sell-Side Engagements – assisting owners looking to exit/sell their business
• Buy-Side Engagements – helping companies grow through acquisition programs
• Capital Formation – aiding companies in raising capital for growth or recapitalization

For more information about our M&A Unicorn list, please contact FOCUS Managing Director and Cloud Team Leader Mitch Prust at [email protected].