Cloud Sector Boom Accelerated By Digital Transformation

The rise of cloud computing has been one of the dominant trends shaping technology over the past decade. Enterprises have overcome initial concerns over security, regulation and cost to embrace the outsourcing of their computing power and data storage needs. This shift to the cloud is, in turn, enabling digital transformation and the adoption of digitally enabled business models, across all sectors.

Companies are pivoting away from owning and operating their own servers and infrastructure “on-premise”, and in third-party data centres, toward private virtualised cloud and public cloud from hyperscaler providers. This change is an essential part of the evolution of the digital economy.

Perhaps the defining feature of the structural shift that has taken place in the global economy in the past 10 years has been the proliferation of data, to an almost inconceivable degree. Half of the world’s data, amounting to approximately 100 zettabytes, is expected to be in the cloud by 2025. 50% of corporate data is there already, up from 30% in 2015. That’s where cloud services come in. They allow businesses to process, store and manage this avalanche of data in a more efficient, secure and scalable way.

Leveraging that data, combined with the ever-increasing computing power and applications available in the public cloud, is allowing companies to transform their business models. This, in turn, is propelling innovation, enhancing client service and allowing companies to reach broader markets.

Digital transformation is also creating wholesale change in industries ranging from healthcare to finance, and agriculture to logistics. Using cloud-based services, farmers, for instance, can gauge insights on soil profiles, monitor crop growth and make better-informed decisions about what crops to grow and how to optimize yield. UPS recently announced an expanded deal with GoogleGOOG
Cloud to increase its network, storage and computer capacity to help analyze new data and optimize its commercial operations. The biggest public cloud providers also continue to push the envelope in what they offer to enterprise clients. Google Cloud recently announced the launch of BigLake, its new data lake storage engine that will make it easier for businesses to analyze their data warehouse and lakes.

The public cloud market is dominated by the ‘big three’ of Amazon Web Services, MicrosoftMSFT
Azure and Google Cloud. If “on-premise” computer power and data storage was the equivalent of housing an energy generator on site, then AWS, Azure and Google have become the national grid – on a global basis. But instead of electricity generated by power plants, their data centers are providing a readily available supply of processing capacity at both centralized and “edge” locations, as well as greater levels of secure data storage.

However, when looking at the impact of the cloud computing revolution on deal activity across the digital economy, it is clear that Amazon, Microsoft and Google, are too large to be plausible acquisition targets.

So what is driving such high levels of M&A in a sector where there are only a few major providers?

It is the acquisition of services companies that enable the transition into cloud, and the continued need for managed services to cope with change, operational complexity, security and multi-cloud.

Businesses, including global systems integrators, want to bolster their service offering to enable digital transformation and manage the complexities of shifting to cloud platforms. Equally, financial investors want exposure to these high-growth services businesses.

As demand for moving business operations into the cloud increases, specialist service providers who can support the complex transition of applications into cloud environments, or have a workforce of cloud engineers, are becoming increasingly attractive acquisition targets, for both trade and financial buyers. Challenges that public cloud specialists help address include the technical difficulties in rewriting or refactoring originally “on-premise” services for the cloud; legal obstacles, such as a perception of reduced security; and commercial concerns around the pricing risk of being locked into one cloud vendor.

We can see this through, for example, IBM’s acquisition of Nordcloud, the leading European public cloud services provider, helping it to materially strengthen its hyperscaler services capabilities. This was also demonstrated in Cognizant’s acquisition of New Signature, one of the world’s largest independent Microsoft public cloud transformation specialists, in July 2020, helping it to deepen its expertise across the Microsoft cloud product suite.

Other major cloud deals include Content+Cloud being sold to Nordic technology services provider and Goldman Sachs Asset Management portfolio company, Advania, in December 2021, to increase, tailor and diversify the cloud offering the combined group could deliver to its clients, and Node4, one of the UK’s leading providers of cloud-led, digital transformation and managed services, receiving a majority investment from Providence Equity Partners in March 2021.

Another driver of public cloud M&A is the “acqui-hire”, the process whereby businesses acquire companies to advance their talent pool. A study by Bain & Company found that tech start-ups have been increasing the size of their software engineering and developer staff by nearly 60% each year, the fastest hiring pace among tech and non-tech companies. But this war for talent is also demonstrated through strategic acquisitions involving more established companies. Cloudreach, a portfolio company of BlackstoneBX
, was sold to Atos in December 2021, with the acquirer prominently citing the attraction of adding 600 highly skilled cloud professionals to strengthen its existing cloud expertise.

The demand for specialist support for public cloud transition and management is only likely to increase as new challenges emerge. For example, the implications of the cloud transition for corporates’ net-zero commitments is climbing fast up the agenda. It has been estimated that global data centres’ electricity use in 2020 was 200-250 TWh, or around 1% of global electricity demand.

Cloud experts capable of troubleshooting the emerging challenges associated with transition will remain a valuable asset. This comes amidst challenging questions for enterprises, especially as to how they adopt services and embrace digital transformation. We can therefore expect the M&A boom around cloud computing to continue, consolidating the position of cloud as a major theme underpinning M&A in the digital economy.

Source: https://www.forbes.com/sites/paulnoelguely/2022/06/14/cloud-sector-boom-accelerated-by-digital-transformation/