United States / Spotlight Reports
Top Four Industries Strengthened by Cloud Computing M&A Activity
by Marisa Lifshutz, Analyst
Nov 02 2018

In recent years, cloud computing has emerged as a driving force behind merger and acquisition (M&A) activity across a broad range of sectors and industries. Cloud computing involves the delivery of on-demand computing resources, typically on a subscription, pay-for-use basis, over the internet. Cloud computing processes pose a disruption to the traditional business model by changing the way in which a host of computer services, including servers, storage, databases, networking, software, analytics and intelligence, are delivered. By implementing cloud network systems over traditional data centers and servers, companies gain several advantages that include minimal upfront capital investments in hardware, pay-as-you-go capacity, increased network speed and agility and benefits realized from more efficient economies of scale. As a result, companies across all facets of the national economy have increasingly outsourced cloud-based services to various providers, often utilizing more than one cloud network to form a hybrid cloud system. This trend has accelerated M&A activity across a wide range of sectors and industries that provide cloud computing services, with the largest operators increasingly seeking to acquire smaller, specialized cloud-based businesses that enable more traditional technology companies to compete in this explosive market.  

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IT Consulting

Operators in the Professional, Technical and Scientific Services sector (IBISWorld report 54) have largely benefited from the improved data storage and analytics capabilities provided by cloud networks. The trend toward cloud computing, a model in which computer applications are hosted and managed by third-party companies, has transformed the product and service offerings of many of the sector’s most prominent industries. For example, operators in the IT Consulting industry (54151), which represents the largest industry contained within the sector at an estimated $426.0 billion in total revenue in 2018, have increasingly developed new cloud-based products to stay relevant in the wake of rapid technological change.

The industry's largest operators, including IBM, HPE and Dell Technologies, have shifted gears from providing more traditional server and software solutions, toward offering third-platform solutions, such as cloud-based computing and data analytics. Additionally, the industry has been characterized by extensive M&A activity in recent years as larger companies acquired smaller niche players to better position themselves in the changing marketplace.  The most recent example of accelerated M&A activity within the industry is evidenced by IBM’s anticipated acquisition of open software company Red Hat, expected to be finalized in the second half of 2019. The expected $33.0 billion deal would represent the largest acquisition in the company’s history by a significant margin, showcasing IBM’s willingness to bet long on cloud computing services.

Management Consulting

The Management Consulting industry (54161), another major sector contributor with an anticipated $241.1 billion in total revenue in 2018, has been similarly transformed by rapid advancements in cloud computing technologies and data storage. The ongoing transition toward digital technology and cloud computing has provided new opportunities for management consultants to assist businesses with digital consulting services. Like IT consultants, industry operators have benefited from rising demand for custom computer application design and development services from businesses. Similarly, many of the industry’s largest players having acquired smaller cloud consulting and data analytics companies in recent years in an effort to expand their digital service offerings.

For example, Deloitte completed its acquisition of cloud consulting business Day1 Solutions in 2017 and cloud management and automation platform startup ATADATA in 2018, while also adding 3,000 new high-tech engineering jobs to the company’s US operations. Accenture has made similar investments in digital advisory services, purchasing leading cloud advisory and services provider Cloud Sherpas in 2016, content analytics and enterprise search company Search Technologies in 2017 and big data and AI services and solutions company Kogentix in 2018. As these large, multinational corporations such as Deloitte and Accenture have rapidly purchased cloud management services startups over the past five years, they have subsequently expanded the consulting divisions of their respective company portfolios relative to other service segments.

Software Publishing

Within the Information sector (IBISWorld report 51), the rise of cloud storage has similarly presented new opportunities for industry operators. Data processing and storage has grown substantially as a share of revenue for operators within the sector as relevant businesses have increasingly outsourced their data storage. This trend is exemplified in the Software Publishing industry (51121), one of the largest industries contained within the sector with an estimated $250.4 billion in revenue in 2018. The largest software publishers within the industry have aggressively targeted innovative startups, particularly those with strategic patent portfolios, to increase their foothold in regards to cloud computing services.

For example, multinational software publisher SAP SE has made several notable acquisitions of specialized cloud network companies in recent years, including the company’s dual 2016 acquisitions of big data platform Altiscale and cloud analytics company Roambi, as well as the recently finalized 2018 purchase of cloud-based sales, marketing, learning and customer experience solutions provider, Callidus Software, for $2.6 billion. Furthermore, multinational software publisher, Adobe Systems, has similarly pursued several cloud computing M&A deals over the past five years, including the company’s recently finalized acquisition of cloud-based digital commerce platform provider, Magento, for $1.7 billion.  While the largest operators within the Software Publishing industry have the capital requirements to invest in large-scale hardware purchases necessary to run cloud-computing services, smaller providers of productivity software have been increasingly threatened by the competitive edge provided by cloud systems, driving consolidation within the industry.

Wireless Telecommunications Carriers

Similar trends have carried over into the Wireless Telecommunications Carriers industry (51721), the largest industry contained within the Information sector with an estimated $272.1 billion in revenue in 2018. Within the wireless telecommunications space, cloud computing presents industry carriers with an opportunity to provide solutions that depend on wireless access. In particular, the introduction of 4G services has provided wireless carriers with an opportunity to substantially increase revenue generated from the corporate segment through managed cloud-computing services. This trend has accelerated the level of M&A activity within an already highly-concentrated industry, with the top four players collectively generating just under 70.0% of total revenue. For example, AT&T completed the acquisition of AppNexus, a cloud-based, programmatic online advertising software platform, in 2018 for a purchase price of $1.6 billion.

Looking ahead

Over the next five years to 2023, cloud computing is anticipated to continue gaining traction among sectors across the macroeconomy, greatly expanding capabilities on platforms previously limited by the nature of their hardware but not connection speeds. Cloud computing has also transformed the business end of operations for many industries, slashing operational costs and boosting profitability. As cloud-based networks and hybrid cloud systems continue to proliferate in light of rapidly rising demand, the cloud computing landscape will be increasingly dominated by larger, more traditional technology companies as they seek to acquire smaller, specialized cloud-based system operators, driving consolidation.

 

Edited by Emily Lidstone