M&A Focus: Data Processing and Hosting Industry

data hostingThe Data Processing and Hosting industry provides infrastructure for hosting or data processing services used for a variety of activities related to information technology (IT), and ranging from web hosting to automated data entry services. Businesses are outsourcing more of their IT infrastructure needs, directly benefiting the Data Processing and Hosting Services industry. As a result, the industry has fared well during the five years to 2013, with revenue growing at an annualized rate of 2.4% to $83.8 billion. The industry’s growth reflects a stronger economy and increasing use of industry products. In fact, cloud computing has become one of the fastest-growing services offered within the industry. Major player International Business Machines’ (IBM) cloud-computing segment more than tripled its revenue in the past year alone.

In recent years, industry operators have consolidated to increase the subscriber base over which they can allocate computing resources. As a result, merger and acquisition (M&A) activity has grown quickly in the Data Processing and Hosting industry, especially in cloud computing. In the next five years, industry operators are expected to continue to expanding their cloud-related services to meet the growing IT needs of their clients.

The expanding cloud

The cloud is similar to time-sharing mainframe computing resources; however, rather than a single mainframe, a cluster of computers is virtualized into a single computing entity. The entity’s resources can then be divided and distributed as needed to clients, who pay based on their needs or usage. This new technology has become a fast-growing segment for many large industry operators. Major companies IBM and Hewlett-Packard (HP), which account for 15.6% and 14.1% of the industry’s market share, respectively, have both heavily integrated cloud computing into the data processing and hosting services they already offer. As a result, this segment has experienced tremendous revenue growth in the past few years.

Cloud computing serves as an efficient tool for smaller businesses with fewer resources for IT-related capital investments. Industry firms offer a variety of cloud-computing options for businesses of all sizes via capacity-based pricing plans. These potential clients often have business plans that depend on their ability to access and manipulate their own data, so they may opt for cloud-computing services to handle their IT needs. On a consumer level, cloud-computing services are now offered free of charge from Google’s Drive, Apple’s iCloud and Dropbox’s cloud storage client. These services allow users to store any type of file on the cloud and access them on any computer or mobile phone. While the base subscription is free, paid premium subscriptions that increase the maximum storage capacity are available. As new cloud technology continues to develop, more businesses and consumers will demand more cloud-related services, thus increasing industry revenue and profit.

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Changing industry climate

Growth in cloud-computing products over the past five years has heavily contributed to the growth in M&A activity. In addition, flooding in Thailand that affected hard-drive manufacturing plants in the country during 2011 reduced the available supply of computer hardware, pushing companies that managed their IT infrastructure needs in-house to opt for a third-party provider. Cloud computing in particular makes it easy for companies to maintain an IT infrastructure without a high capital investment, as data and information are processed remotely. Consequently, companies looking to reduce overhead are quickly adopting cloud computing into their IT infrastructure and are demanding a more comprehensive suite of IT services. Traditional IT firms, which focus on software- or hardware-based solutions, are quickly engaging in M&As with companies that specialize in cloud computing to take advantage of this rising demand and offer a one-stop shop for clients seeking data processing and hosting services.

Consolidation and employment declines are expected to continue as companies pursue M&As. As a result, the number of firms in the Data Processing and Hosting Services industry is expected to decline at an average annual rate of 4.2% to 38,514 companies by 2018. In particular, this consolidation is expected to occur among larger operators with multiple establishments. As a result, the disparity between the number of establishments and the number of enterprises (i.e. their parent companies) is expected to decrease.

Recent M&A activity

In August 2008, Hewlett-Packard acquired Electronic Data Systems (EDS) for $13.8 billion. The transaction increased HP’s industry-relevant revenue 68.7% in 2009 by combining EDS’ systems infrastructure, application development and business-process outsourcing services with HP’s offerings.

In late 2012, Cisco Systems, a designer and manufacturer of networking equipment, acquired Meraki, a provider of cloud-controlled wireless networks, routing and security services, for $1.2 billion. Cisco’s acquisition of Meraki expanded the company’s variety of cloud networking products for mid-market customers and enhanced Cisco’s enterprise network offering. Meraki provides schools, organizations, and midsize and large companies with wireless networking and security devices, in addition to management software. Even though the acquisition increased Cisco’s market share, the company still generates less than 5.0% of the industry’s revenue due to the highly fragmented nature of industry firms.

In October 2012, SAP AG, a business management software solutions company, acquired Ariba Inc., a cloud-based business commerce network company, for $4.3 billion. SAP’s acquisition of Ariba will increase the company’s expertise on cloud-based business-to-business collaboration. Also in 2012, Oracle acquired cloud-based human capital management firm Taleo for $1.9 billion, and marketing automation software-as-a-service company Eloqua for $956.0 million, increasing Oracle’s breadth of data processing services. Despite the acquisitions, SAP and Oracle still generate less than 5.0% of industry revenue due to the large number of firms in the industry.risk

Risk and opportunity

Risk in the Data Processing and Hosting Services industry is expected to be at a medium-low level in 2013. The primary positive factors affecting this industry are a growth life cycle stage and an increasing percentage of services conducted online. Also, the increasing percentage of services conducted online is contributing to growth in the cloud-computing segment, pushing larger industry firms to engage in M&As with small to midsized companies that have developed cloud-computing products.

Structural risk will be at a medium level over the five years to 2018. High competition among operators is the industry’s biggest source of difficulty. Businesses competing fiercely for market share are forced to incur expenses to differentiate their offerings, keep prices low to entice demand or both, which could potentially lower revenue and profit. However, the Data Processing and Hosting Services industry is growing, which means higher profit margins and plenty of opportunities for expansion. Moderate revenue volatility is a lesser threat to operators, and necessitates that firms manage cash flows sensibly and are prepared for any downturns in demand. This factor has contributed to consolidation as industry firms engage in M&A to increase the breadth of services offered and hedge the risk of a potential decline in a specific service segment.


During the next five years, data processing and hosting firms will continue to engage in M&As as they combine resources and infrastructure to offer more comprehensive services to clients. In particular, consolidation is expected to occur among larger operators, which typically have more than one facility. Consolidation among these larger operators will result in a dramatic reduction in the number of firms with multiple establishments. The number of establishments is expected to decline to 38,750 facilities in 2018, from 50,620 in 2013, representing an annualized 5.2% decrease. Meanwhile the number of smaller, independent operators that provide low-intensity web hosting is expected to remain high for some time. Such operators will continue to be prime acquisition targets for well-established companies in the Data Processing and Hosting industry.

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