08 Jan Hot Market – Microsoft Cloud M&A
In this blog, we will profile a market sector within Tech M&A that is seeing a lot of activity recently due to the rise in virtualization, cloud-based IT investment, and significant innovation developed by Microsoft and its partners. We have recently done several transactions in this space and our strategic growth advisory clients are seeing strong demand from customers.
Market Sector Outline
Microsoft and partners are creating a compelling worker productivity and IT platform with the convergence to Azure, Teams, SharePoint, Dynamics, Power Apps, and Office plus third-party applications and services. These solutions address content creation, collaboration, communications, office automation, back-office solutions, and analytics.
Increasingly, market players are serving up turn-key integrated offerings for specific verticals. Cloud-centric deployment solves a variety of problems for customers, including speed of implementation, reduction in up-front capital costs, and speed of updates for agile workplace cultures. This convergence is being well received by the market and is a key driver of revenue for Microsoft and their entire partner ecosystem.
Adoption was initially fueled by the pandemic and has been sustained by broad-based adoption of virtualization, which expands the potential pool of quality workers and decreases overhead costs by reducing office space requirements. The commoditization of cloud datacenters is also driving this trend since cloud datacenter hosts are achieving economies of scale that individual customers could not do on their own.
Other players like Amazon (AWS) and Google are sizable contenders for public cloud implementations, but they do not have the combination of business supporting applications and the ability to integrate these offerings that Microsoft and its partners tout.
This market is huge in terms of potential revenue. In the third quarter of 2022, Cloud revenue amounted to $25.7B of Microsoft’s $50.1B total and grew at a rate of 24% year-over year. (source: MSFT quarterly results release, Oct 25, 2022) This does not include revenue from the myriad partners, ISVs, and service providers who participate in the Microsoft Cloud ecosystem.
Lots of opportunity: ISVs, VARs, and service providers are all needed to provide the tailored solutions that customers want. Microsoft typically only does the core offerings that are essential for mainstream needs. It leaves the niche specifics and services to third parties. Microsoft also provides marketing dollars and assistance to partners who fill important gaps in fostering adoption in particular market segments.
Why is Microsoft Cloud M&A Hot?
Cloud M&A activity is already significant and is likely to grow.
- Recurring revenue models are particularly attractive in the marketplace. Investors like the steady cash flow and predictable revenue streams.
- B2B services have proven to be resilient in challenging economic climates. Companies may be forced to lay-off workers, cut advertising, defer capital expenditures, or reduce production. Cloud platforms have become a central part of company infrastructure and are thereby difficult, if not impossible, to cut.
- Investors follow customer demand and there is a large customer demand for cloud solutions.
Investors see the trajectory of Microsoft’s Cloud offerings and the disproportionate share of Microsoft’s revenue that the Cloud now commands. In a rocky time for investors as a whole, Cloud technology and services seem like a pretty safe bet.
Within Tech M&A, opportunities are good for software companies and cloud services providers. Demand is strong from customers and valuations are strong for sellers. It is a seller’s market, which usually means that there are competing offers for good companies.
To get the best valuations, companies need to have:
- Reliable profitability
- Growing revenue
- A defined market with opportunity for expansion
- Sticky customers without undue customer churn
- Clean books, with GAAP financials on an accrual basis
- A bench of good leaders, besides the owner, who can run the company if the owner were not present
ADG has been a part of the Microsoft world since MS-DOS was their flagship product. Our Microsoft experience includes software development on their platform, IT services and resale of their products, executive management of large installations of Microsoft technology, years of experience doing M&A for Microsoft at their Redmond HQ making the acquisitions that formed the basis of the Azure platform, and recent transactions with mid-market players in the Microsoft Cloud ecosystem.
In addition to having a combined 60+ years of experience in Tech M&A, we are software engineers, technologists and IT service providers who understand the intricacies of this market. We speak the language of buyers and sellers and see the opportunities that are out there for both.
This is a market with a lot of opportunity now and is converging to be an even bigger opportunity in the future for investors and entrepreneurs who place their bets wisely.
About Austin Dale Group: The Austin Dale Group is a Tech M&A Advisory firm based in Austin, Texas. We work with clients on the buy-side and the sell-side to achieve the best outcomes for their businesses. We also provide strategic growth consulting and valuation services to privately held companies.