EY partner talks M&A trends in Enterprise Cloud & Internet Infrastructure

The past year has been an active one in the enterprise cloud space for infrastructure and datacentre operators. Notable M&A transactions in the sector have included Digital Reality's acquisition of Netherlands-based datacentre giant Interxion in a US$8.4bn deal or Inflexion's acquisition of UKFast for £405m, among others, with this investment expected to continue into the new year.  

Ahead of TMT Finance World 2019, where EY is chairing a session on Enterprise Cloud and Internet Infrastructure, Olivier Wolf, Partner and TMT-Transaction Advisory Services Leader at EY-Parthenon speaks to Lucía Camblor from TMT Finance and discusses trends in the sector.

Main buyers and sellers

New verticals like machine learning and artificial intelligence, as well as the growing value of data and analytics, have become attractive drivers for activity in the space. Hyper scalers are leading the way to scaling-up their platform offering.

“Hyper scalers continue to invest heavily in expansion as they’re extending their physical presence in a number of countries. They want to win customers and enterprises which wish to have their data physically close to them,” says Wolf.

However, a great amount of investment is also coming from sponsors, which are showing their appetite for the sector. “We've also seen private equity firms and infrastructure investors continuing to invest. Particularly with those providers who have a depth of technical expertise and a strong customer relationship,” Wolf added. 

“That is important in a world where there's still some technology uncertainty and therefore the strength of customer relationship is something valuable for foreign investors,” he said.

 M&A strategies in the space

Synergies extracted from M&A enable businesses to acquire scale and capabilities, while customer stickiness continues to retain a great amount of value creation.

“We expect more and more focus on adding more services higher up the value chain. There'll be less margin for aspects such as routine maintenance or running infrastructure. So, those higher margins will be owned by those providers, which can proactively help companies to adopt technology to better serve customers.”

In terms of partnerships, more consolidation is expected as hyper scalers and other services seek value. “We were seeing some interesting partnerships. Hyper scalers such as AWS (Amazon Web Services) are seeking to build the same depth of the work that Microsoft has. Also, providers like CRP require professional services and management services to support the migration and to maximize the value from it.”

As for the geography of players in this space, there were historically fewer US buyers entering the European market. However, this is changing as recent deals in the space show how transatlantic buyers are increasing in Europe. However, it is still unclear if this is the beginning of a new trend, explains Wolf.

Cloud and datacentre evolution

Amid increased sophistication and segmentation in the marketplace, cloud services providers are deepening their vertical expertise. “For example, in healthcare or financial services, we see providers creating particular services and offerings for the sectors and thereby demonstrating specific knowledge of IT challenges,” says Wolf.

On the service layer, cybersecurity continues to be essential to avoid vulnerabilities in the infrastructure, and it is driving M&A activity. However, value creation in this area remains in the lower ends.

“From a cloud supplier perspective, they need to have an element of capability. They can't cover all the specialisms of cybersecurity, but they need to have enough skills to be able to orchestrate that layer of cybersecurity,” states Wolf.

Deals in this subsector are expected to continue to increase, however these transactions will “tend to be quite relatively small and more about skill acquisition than scale acquisition. So yes, there'll be some volume, but not a huge amount of value,” says Wolf.

Meanwhile, on the infrastructure layer, new tech is opening opportunities. Datacentre providers are offering value added services, giving connectivity to hyper scalers and software-as-a-service (SaaS) providers, explains Wolf.

As edge computing develops, datacentre businesses will be able to explore new possibilities to capture value. “We are still at the very early days of edge computing business models; we think generally that's going to be a big opportunity that definitely will have an impact. But is that going to push centralised computing gradually to the edge? Is it just going to happen faster? We're in a position to conclude that this is really early days.”