We’d like to thank our clients and colleagues for a great 2017. Overall M&A activity in cloud, hosting and related business segments was again at high levels and we were fortunate to complete 58 transactions during the year. Our M&A transactions included a broad mix of sizes of cloud, hosting and related businesses and we have now completed over 430 internet related transactions since we first got started in the Internet services space in the mid-1990s.
As the New Year starts, we’d like to take a moment to highlight some of our observations on the hosting, cloud and related business markets.
SMB hosting/cloud business is a market of siloed mass-market-products: While this is not new, it is fascinating to us that such a large percentage of the SMB providers in the hosting/cloud space are companies offering a limited set of products/services on a mass-market, often commoditized basis. This focus on a limited product/service set is great for several reasons but it can also can create problems, particularly when market growth slows either due to maturation or competition from substitutes.
What happens when growth slows? As market growth has slowed in several business segments, the limited product/service set providers in those segments have seen their growth slow along with it. Providers that had been growing more slowly than the market to begin with have had difficulty even replacing normal attrition and some have begun to shrink.
Options: Service providers in these slow growth segments appear to be pursuing one or more of several paths (generally in order of declining difficulty);
- Using sales and marketing to take customers away from other providers
- Expanding into new products/services that are either related or have related customer bases
- Abandoning customer growth as a goal and running the business to maximize the cash flow from these customers (either for distribution to owners or for expansion into unrelated businesses)
- Using M&A to acquire customers or exit the business.
It appears larger providers pursue several of these options simultaneously. The small to mid-sized providers generally tend to focus on one or two.
Our view: While there will be a few providers that can take customers away from others and continue growth in these mature segments, we don’t think it will be possible for most providers unless they offer new, higher growth products or services. As such, we expect to see providers in these segments either (a) diversify into a broader suite of products/services with related customer bases, or (b) use M&A to acquire customers or exit.
We hope this is helpful and we look forward to working with you in 2018.
Hillary Stiff & Frank Stiff
Cheval M&A, Inc.
Cheval Capital, Inc.