Those of us in the industry who have been playing close attention to managed service provider valuations have been somewhat pleased in the last few years. Valuations for MSP organizations have, in general, been on the rise (I'm not going to post any multiples here because chances are someone will take offense...if you want to know what we are seeing you can ask me directly). While there have been a few factors that have tried to dampen MSP values, on the whole, we have seen a decent increase in valuation multiples and actual money spent on M&A transactions. Could cloud computing change this trajectory?
It's strange that we are witnessing the
rebirth of the ASP movement and yet many in the industry (and outside it) are treating cloud as an entirely new business model. It isn't...but that's not the point of this blog. The point is that while cloud (i.e., ASP) is not a new business model, it has yet to show us any real valuation data. We just haven't seen any M&A transactions related to cloud companies that we can then compare to the MSP valuations we have been tracking for the last decade.
There are, however, a few data points we can look to in order to handicap the likely cloud valuations in the next few years.
- Cloud is really ASP reborn
- Cloud/ASP is all about the application layer
- Application management has always been the pinnacle of managed service providers, meaning it typically yields the most profitable revenues and the most intimate relationships with customers
- Some cloud providers are not realizing the full potential of the business model, generally because they do not deliver any service; instead, they resell another cloud provider's solution, often bundling multiple solutions together as a cohesive product
- There is no reasonable expectation that cloud resellers will have high valuations any more than their MSP reseller counterparts did; in other words, to get the real value you must deliver the service yourself!
- Cloud providers probably have the same capability to see really lucrative valuations in the next few years, if they adopt the same principles as the MSPs
We will continue to monitor the cloud valuation marketplace. Cloud providers are slowly beginning to emerge and ask for formalized valuation engagements, but the real test will come when they either sell, merge, or go public. Only then will we see what the true valuation trends will be.
