We want to thank all of our clients and colleagues for a great 2015. We were fortunate to complete a record 40 transactions in 2015. These transactions included a broad mix of sizes & types of businesses and a number resulted from the vibrant IPv4 transaction market (now that the registries have exhausted their IPv4 supply.) We are now up to 316 hosting and related Internet services transactions since we first got started in the space in the mid 1990's. Our M&A experience in 2015 does not appear to have been unique. M&A activity in the hosting and co-location segments was at high levels during 2015 with the number of transactions and transaction values exceeding 2014 levels (including co-location.)
During the year a number of trends caught our attention that we thought might be of interest.
Vibrancy of the Industry
The Hosting Industry had another great year in 2015. Despite its very large size (~$70+bn), the industry grew at an estimated 20% rate from 2014 to 2015. The highest percentage growth rate was in the Platform as a Service sector (~29%), with the largest dollar growth rate in the industry's largest sector, Managed Hosting. This segment posted an estimated growth of $5.6bn or a 47% share of new industry revenues added. Growth however, was not evenly shared across companies and it is does appear clear that overall growth is decelerating.
The drivers of growth continue to be well understood. These include;
- Increasing complexity is driving companies to outsource existing services and expand their need for new services;
- The economies of scale that service providers can achieve make their offerings attractive in value terms; an
- Companies like the convenience of a single vendor.
Major Industry Trends Remain Intact
Last year we highlighted some trends that had recently emerged and represented a departure from past experience. These trends continued into 2015. Notably;
(1) The large, non-Amazon, cloud providers continued to gain workloads and revenue at high rates. The business models for these newer providers have gained traction and while it appears that Amazon will continue to dominate the space for the foreseeable future, these newer providers are increasingly competitive. Our expectation is that the continued growth of Amazon, Microsoft, IBM and Google will have an increasing impact on the economics of hosters in all segments.
(2) The rationale for M&A transactions has expanded sharply from consolidations to a much broader mix including products/markets/capabilities; and
(3) Historically commodity oriented providers have been adding features and services to create differentiation and move out of the commodity area.
All these trends continued, if not strengthened in 2015, and we see no reason why they won't continue for some time. There were also several additional factors that caught our attention during the year;
(4) The mid-sized providers, those larger than $10-$15MM of EBITDA, have been getting bought out over the last few years and we are headed for a bar-belled like space with mostly large and small providers but few mid-sized ones. While we don't expect all of the providers in this range to get bought out, and some new companies will grow into the range, we do expect this trend to continue. For companies in this range, that means a very attractive supply/demand environment when the decision is made to exit.
(5) We have been seeing more highly specialized companies emerging. These companies seem focused on providing a single, highly specialized service. The recently emerged Dispel.io and their Security as a Service being just one example. The expanded M&A rationales (#2 above) appear to be feeding supply/demand for these types of companies.
We hope this has been of interest and if you have any questions please contact us.
Best wishes for a healthy and productive 2016
Hillary Stiff & Frank Stiff
Cheval Capital, Inc.
January 11, 2016
