Integrating XaaS Companies
Anything-as-a-Service (“XaaS”) platforms continue to dominate cloud-based product solutions as processing and memory costs steadily decline and connectivity capabilities accelerate. The lower costs and higher efficiency associated with these services make them attractive to both the solution provider and the customer.
For solution providers, XaaS offerings generate recurring and more predictable revenue streams than on-premises alternatives, and typically enhance customer lifetime value. For customers, cloud-based solutions reduce upfront capital expenditure requirements, make cash outflows more predictable and can be tailored to specific use cases. It should be no surprise that worldwide spending on public cloud services will grow at a 19.4 percent compounded annual growth rate (“CAGR”) from nearly $70 billion in 2015 to more than $141 billion in 2019.1
XaaS offerings are wide-ranging in breadth and the sector remains highly fragmented. This makes it ripe for opportunistic consolidation across the large number of startups and established players to accelerate transition of their business models. Consequently, XaaS companies have been at the forefront of merger and acquisition (“M&A”) activity in the past few years. There was $50 billion of public company cloud-related acquisitions occurring in 2015 — a 60 percent jump from $30 billion of related deals in 2014 — and deal activity is expected to remain strong through 2017.
Unlike traditional M&A that typically relies primarily on cost saving synergies, transactions involving cloud-based service providers are mostly revenue-driven deals. They offer buyers the potential to scale up, close gaps in product portfolios and become more deeply embedded with clients by offering a wider array of customizable and/or integrated business solutions. On-premises solutions require extensive engineering, support and professional services costs to maintain multiple legacy versions, and these costs are exacerbated by the complexity of acquisition integrations. That said, XaaS integration comes with its own unique considerations around deal execution, its impact on functional areas (e.g., marketing, sales, products, pricing and customer service) and other related risks and opportunities.