In 2007, investment banking boutique Q Advisors conducted the first cloud-UCaaS deal in the US valued at US$10m. Twelve years later, the cloud, managed services and digital infrastructure-focused advisory firm awaits the closing of the latest in a string of US$1bn+ valued deals in the same, and yet much-changed, space.
Ahead of the TMT Finance World 2019, at which Q Advisors is chairing a session on Managed Services, Cloud and ICT, as well as a fireside chat, Michael Quinn, Founding Partner at Q Advisors, speaks to Thomas Simpson of TMT Finance about transferring the firm’s expertise to Europe and firming up Q’s position in the European advisory market.
European sights
Since its founding in 2001, the Q Advisors’ practice, led by Gerry DeHaven and Quinn, has conducted over 100 cloud and digital infrastructure-related deals, with around 20 taking place in Europe in eight jurisdictions, despite the firm previously having no presence on the continent. Earlier this year, Q announced the opening of its inaugural European office, based in Amsterdam, and plans to replicate its success in the US on the continent.
“Our first European cloud deal was in 2015: the sale of UK-based Magnetic North to Nebraska-headquartered West Corporation (now Intrado) and we ran a really competitive process with mostly US buyers and a few European buyers,” says Quinn. “We feel that cloud consolidation in Europe is still in its early days and there is a lot more to come, with the pace of consolidation increasing rapidly.”
The opportunities available in Europe are abundant, notes Quinn, citing the sheer number of companies reaching scale and readying to roll up or be rolled up.
“In the US, most of the smaller players have been rolled up, and very few with US$20m or less in turnover are still around. However, in the European markets, there are numerous companies with US$10m to US$30m in turnover that are independent,” Quinn says.
Several of Q’s deals conducted in Europe are placed within these parameters, including: STARFACE in its recapitalization by funds advised by Maxburg Capital Partners, Dean One in its acquisition by Gamma Communications, Centile in its acquisition by Swyx, Blueface in its merger with Star2Star and Within Reach Group, Swyx Solutions in its acquisition by Waterland, Mtel in its acquisition by EvolveIP and Motto in its acquisition by Destiny.
Trans-Atlantic transactions
The uptake in M&A by both American financial sponsors and strategic players in the European cloud and UCaaS markets has often been slower than other TMT verticals. According to Quinn, the three biggest players in the US market – 8x8, RingCentral and Vonage – have all struggled with gaining a foothold on the opposing side of the Atlantic.
“The failures recorded by the big US players can be categorised under a few sections, but one is above the rest: connectivity,” says Quinn. “In Europe, customers want network connectivity from their provider and that was never on the table, except with Vonage through reseller agreements.”
The big three, and other emerging US rivals, are likely to return to vie for positions in Europe and grab market share sooner rather than later though, Quinn notes. He says: “These players are going to come back into this market and will look for two things: companies with scale and companies in multiple jurisdictions that have local management teams.”
“While they might not have seen too much success in previous attempts, I believe that this might be about to change,” Quinn adds.
More than just money
Europe is going to experience significant consolidation over the next 36 months in the UCaaS and MSP spaces, states Quinn, adding that another name that can be expected to play a decisive role is the infrastructure fund.
“Infrastructure funds are currently making big plays, not only in the communications infrastructure arena but also in managed hosting,” Quinn notes. “The funds are paying higher multiples than the rest of the competition, not because they want to but because they have a longer-term view on investments and often a lower returns threshold.”
As well as infrastructure funds and the “big three” entering and continuing to drive consolidation on both European and American soil, Quinn comments that hyperscalers will also enter the M&A fray. “Hyperscalers, such as Amazon, are expected to start buying MSPs in Europe, as well as in the US. These companies are providing services that the hyperscalers don’t possess; deals like Vonage’s acquisition of NewVoiceMedia will be a common occurrence. Ultimately, hyperscalers will be looking to put more tools in their toolboxes,” he says.
However, with more potential investors eyeing moves into the space, it will be increasingly imperative for communications infrastructure and digital companies, and their advisers, to choose new backers, and owners, wisely.
“Dealmaking is not solely about the money, but more of whose wallet it is coming from,” says Quinn. “Essentially, price is important, of course, but it’s also about fit and culture: that’s what we look at most for our clients at Q Advisors.”
He states: “Just because a party can pay the highest price, doesn’t mean that they are the best fit. if they are going to cull your workforce or heavily dictate directions of your business, then how does that message resonate with the founders and entrepreneurs?”
“At Q Advisors, while valuation is obviously extremely important, we also assess the fit for our clients and how they can grow with the strategic buyer or financial investor.”
