Private Equity: Here’s How to Find the Best Cloud Service Provider M&A Targets

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FOCUS Investment Banking’s Technology Services Team recently created a predictive custom scoring of the top 1,138 managed service provider M&A targets for private equity investors. FOCUS has now applied that same methodology to the Cloud Service Provider (CSP) market.

FOCUS believes its research will shine a well-deserving light on CSP founders and CEOs—and their respective teams—and make it easier for them to access private equity capital to fuel even more growth. This is especially true for some of the hottest CSPs that are managing and driving recurring revenue (for example, Azure Consumed Revenue), those that have obtained coveted status (such as Azure Expert MSP or AWS Premier), or have recurring revenue around backup and disaster recovery in the cloud.

Why CSP values are holding up

While the public market has seen a sharp drop in the share prices of some cloud companies, such as Snowflake and Twilio, MSPs—and particularly those that provide cloud-related professional services—continue to defy the downtrend and add value through M&A, for both parties in the transaction. 

CSPs are benefitting from the fact that companies remain focused on reducing their costs. By further outsourcing more of their IT, including cloud services, to outside providers, they can leverage their economies of scale and expertise for less money. Cloud migrations and the outsourcing of IT and other services is crucial as businesses strive to increase internal efficiencies to boost valuations and profitability. A tried-and-true formula that keeps working even in uncertain times is for firms to commit to their missions while allocating resources to enhance the customer experience. As long as MSPs and CSPs continue to deliver outstanding service and returns and are seen favorably by investors, private capital is still in plentiful supply. 

A recent Wall Street Journal article noted that the recent volatility in the public market is actually “pushing” corporate chief information officers to “increase cloud spending” this year. “Economic headwinds [will] prompt IT chiefs to focus their budgets on subscription-based cloud software and services,” the article said. While overall IT spending is expected to grow by 3% this year, spending on software is projected to increase by nearly 10% while outlays by cloud providers on new servers is forecast to grow 16.6%, according to Gartner Inc.

“Capital is abundant as cloud services continues to show impressive returns and remains an attractive target for investment as a whole,” said Stan Gowisnock, Managing Director and Technology Services Team Leader at FOCUS. “As corporations are looking to improve internal efficiencies to bolster valuations and profitability, outsourcing of IT and other teams remains paramount.  Committed missions of corporations, with capital directed to improve customer experience, is a long-standing formula that continues to work even in uncertain times.”

What CSPs do

CSPs are heavily involved in lots of areas, including: cloud strategy, design, implementation, migration (applications, platforms and workloads), building data lakes for data scientists and data warehouses for business analytics, artificial intelligence, machine learning, modern workplace, automation (DevOps), security and ongoing managed services. They mostly partner with the following big cloud companies to offer cloud-based infrastructure or storage services from: 

  • Amazon Web Services (AWS)
  • Microsoft Azure 
  • Google Cloud Platform (GCP)
  • Oracle Cloud Infrastructure (OCI)

They tend to offer various “as a service” offerings, including:

  • Platform as a Service (PaaS)
  • Software as a Service (SaaS)
  • Infrastructure as a Service (IaaS)
  • Disaster Recovery as a Service (DRaaS)
  • Backup as a Service (BaaS)
  • Containers as a Service (CaaS)
  • Functions as a Service (FaaS)
  • Security Operations Center (SOC) as a Service (SOCaaS)

The FOCUS CSP algorithm

FOCUS’s proprietary algorithm takes into account over 40 datapoints to help determine each company’s score, including growth intent (percent change of new job postings on LinkedIn, Indeed and Glassdoor); employee count (12 months percentage growth rate); and web traffic (12 months Alexa rank percentage change). This allows us to quickly dig deep into factors such as emerging specialties, growth rates, and technical differentiation, and then rank order the top companies for M&A.

Ultimately, our custom scoring system ends up being a great way to prioritize and differentiate many of the best buy and sell candidates. It’s also helpful to further leverage our technical expertise, especially for technical services, MSPs and the cloud market. We bring technical cloud expertise and combine it with FOCUS’s more than three decades of experience for the benefit of our clients.

Announcing the CSP “Unicorns” for 2022

Today we are announcing the “Second 50” Ranking of CSPs for 2022. FOCUS believes these CSP “M&A Unicorns” will provide outsized returns to CSP founders and CEOs and their private equity investors. The onus is on these companies to differentiate and position themselves for growth by conceiving “new school” approaches to help their clients find and create exceptional assets—and close deals.

It’s clear our algorithm works: Across the 800+ CSPs we track, many of them are quite active in M&A activity. In fact, the number 51 ranked CSP on the list below, Hanu Software Solutions, was acquired while writing this story. 

CSP Market Maker Unicorns – “Second 50”

Ranking

Informal Name

City

State

51

Hanu Software Solutions

Princeton

NJ

52

Immense Networks

Baton Rouge

LA

53

eMazzanti Technologies

Hoboken

NJ

54

Pinnacle Computer Services

Evansville

IN

55

PointClick

Raleigh

NC

56

RapidScale

Irvine

CA

57

RedNight Consulting

Aliso Viejo

CA

58

Silverado Technologies

Tucson

AZ

59

Encore Technologies

Cincinnati

OH

60

stackArmor

Mc Lean

VA

61

Elevated Technologies

Houston

TX

62

SSI

King of Prussia

PA

63

Vintage IT Services

Austin

TX

64

10th Magnitude

Chicago

IL

65

Adistec

Miami

FL

66

BCT Consulting

Fresno

CA

67

Blade Technologies

St. Louis

MO

68

CMA Technology Solutions

Baton Rouge

LA

69

Cloud 9 Infosystems

Downers Grove

IL

70

DLT Solutions

Herndon

VA

71

Ritter Communications

Jonesboro

AR

72

Emerge IT Solutions

Hebron

KY

73

Involta

Cedar Rapids

IA

74

LAN Infotech

Fort Lauderdale

FL

75

LightEdge Solutions

Des Moines

IA

76

Logicworks

New York City

NY

77

Lunavi

Cheyenne

WY

78

Mach Networks

Carlsbad

CA

79

Ntirety

Austin

TX

80

OffsiteDataSync

Rochester

NY

81

PhoenixNAP

Phoenix

AZ

82

ProArch

Atlanta

GA

83

Redapt

Woodinville

WA

84

ScienceSoft

McKinney

TX

85

SmartShift Technologies

Boston

MA

86

StoneFly

Castro Valley

CA

87

FirstLight Fiber

Albany

NY

88

VeriStor Systems

Duluth

GA

89

1901 Group

Reston

VA

90

All Lines Technology

Cranberry Township

PA

91

AppGeo

Boston

MA

92

Aunalytics

South Bend

IN

93

Cascadeo

Seattle

WA

94

Centre Technologies

Houston

TX

95

Cloudnexa

Philadelphia

PA

96

Connectria

St. Louis

MO

97

DP Solutions

Columbia

MD

98

Esource Capital

Miami

FL

99

Excalibur Technology

Barrington

IL

100

Flexential

Charlotte

NC

If you’re looking for the Top 50 unicorns, that list has been reserved for new FOCUS buy-side clients who are seeking:

About the FOCUS Technology Services Team

The FOCUS technology services team is a dedicated group of managing directors and support staff. The team originated and advised on technology transactions with 47 parties in the past 2.5 years alone, and served as advisor to nine technology service platforms that received their first private equity investment.

Our practice concentrates on providing three highly-tailored investment banking services to emerging middle market and larger organizations in the Technology Services industries:

  • Sell-Side Engagements – assisting owners looking to exit/sell their business
  • Buy-Side Engagements – helping companies grow through acquisition programs
  • Capital Formation – aiding companies in raising capital for growth or recapitalization

For more information about our M&A Unicorn list, please contact FOCUS Managing Director and Cloud Team Leader Mitch Prust at [email protected].


By Mitch Prust, cloud team leader and managing director at FOCUS Investment Banking. Read more guest blogs from FOCUS hereRegularly contributed guest blogs are part of ChannelE2E’s sponsorship program.

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