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How to weather the storm of M&A activity among IaaS providers

Consolidation within the infrastructure as a service market may put channel partners into difficult positions. The bottom line, according to experts: Be prepared. Ask yourself how an M&A could impact your customer relationships.

The IT channel is no stranger to merger and acquisition (M&A) activity. Since the channel's early days, IT solution providers, value-added resellers (VARs) and systems integrators have had to deal with the consolidation of their technology partners. It is no different for disruptive technologies like cloud computing. As IT channel companies face M&A activity amongst infrastructure as a service (IaaS) providers, experts say channel companies should be prepared to handle it in much the same way they would approach M&A in any other technology space.

The M&A activity in the IaaS market is definitive but "not terribly surprising," according to Ryan Morris, principal consultant of Boulder, Colo.-based Morris Management Partners. "Eventually, everybody looks at the economy at scale and says, 'This is easier to do if we aggregate the large infrastructure.' It happened to railroads, electrical utilities, car manufacturers, even software at the enterprise application level. That's a very common phenomenon where there are many startups [and] lots of competition, and eventually you get to the acquisition phase, and once you get there, consolidation happens rapidly," he said.

M&A activity amongst IaaS providers

James Staten, vice president and principal analyst of cloud computing and adaptive intelligence for analyst firm Forrester, said the majority of M&A activity in the IaaS space is occurring amongst tier 2 players. "I haven't seen a huge amount of M&A activity in the tier 1 space, which is Amazon Web Services, Azure, Google. Those kinds of players aren't buying people. They don't need to. They are building the infrastructure on their own," he said.

The best strategy is one in which you don't worry about [M&As] because the value you bring is above the service that can potentially be combined.
James StatenVP and Principal Analyst, Cloud Computing and Adaptive Intelligence, Forrester

However, in the tier 2 space, IaaS providers are buying technology or acquiring other IaaS providers to enhance their existing IaaS solution, Staten explained. Still other providers are doing what Staten referred to as "rollups." These service providers have a small reach within IaaS, but they use their resources to buy a whole bunch of other service providers and expand their footprint.

According to John Treadway, vice president of Boston-based consultancy firm Cloud Technology Partners, an acquisition can go one of two ways: "It either kills the company or it makes it successful. The more successful the platform is in the first place, the more likely it will continue to stay successful. … What you [as a channel partner] have to worry about is whether the technology you're building on continues to exist after [the] acquisition."

Staten agreed. "[The service] could go up in price, or [the partner] could see services and capabilities just disappear. In those cases, they have to find a new hosting partner or adapt to what [has] been changed, maybe change their business model, the margins in general or their profitability," he said.

Alternatively, channel companies may find themselves forced to consider changing partners, as when their IaaS provider is acquired by a competitor. "Then they don't want to run on top of a competitor, and they have no choice but to change platforms," Staten said.

The channel partner may also consider changing platforms if the acquisition impacts current business. "Often times, the channel partner's brand is not the reason the customer chooses services from them. The customer chooses the service based on the brand of the end service to be consumed," Staten explained. "During an acquisition, the platform, hardware or provider can all change. The customer might want to do business with you but not with these services, and that's where the channel provider might have to make a change, even if he's happy with how the service has evolved."

Advice from the experts

Bottom line: Channel companies need to be prepared to weather M&A activity. "The best strategy is one in which you don't worry about mergers and acquisitions because the value you bring is above the service that can potentially be combined," Staten said. "Ask yourself: On top of these services, am I able to build unique value that the customer always sees from me? If yes, [then] I don't care [about M&A activity], because I can change the players underneath and my unique value is still protected," he said.

This goes for the IaaS providers that channel companies choose as well. "Choose your partners carefully," Treadway said. "When working with smaller, niche providers, [channel companies] need to consider what the impact of M&A activity might be in the future, so be aware of the strengths of your partner. You're in a safer place if they have a unique differentiator. If it's a lot of 'me too,' that's a risky place to build your business around."

Finally, Morris advised channel companies to focus on the relationships they have with customers. "The shift in the cloud infrastructure space is inevitable. … It's not a surprise, and it's not a cross-my-fingers-and-hope-everything-will-work-out-OK scenario. It's inevitable. Now's the time people will reshuffle the customer control. If Amazon is going through its own Oklahoma land grab, the solution provider needs to have its own version of that. You need to have a sense of urgency for locking in these relationships, because they will last for years into the future," he said.

Next Steps

Buyouts show channel firms shoring up resources, expanding geographical reach and pushing into vertical markets

IT services mergers picking up as channel partners look to scale

The rise of non-Amazon IaaS providers

 

This was last published in August 2014

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