Divestitures push infrastructure M&A to a new high

Contact: Scott Denne

Shuffling ownership, rather than a reach for strategic technologies, drove acquisitions of infrastructure management technologies to new highs in 2016. As we head into next year, we expect the rising spending on cloud – both SaaS and IaaS – to ignite dealmaking, while take-privates and divestitures decline.

Total M&A spending on infrastructure management jumped 57% to $15.2bn, with the volume of transactions rising to 152 from 146 as we near the end of 2016. Big-ticket acquisitions led to the increased spending in infrastructure software. The same is true of many other categories of tech that had a record 2016 – software applications, internet and semiconductors, for example. Unlike those sectors, aging assets with reliable cash flows, rather than growth opportunities at high valuations, characterized dealmaking in infrastructure management.

The two largest transactions in this space – Hewlett Packard Enterprise’s $8.8bn sale of its software business to Micro Focus and Francisco Partners’ purchase of Dell’s software unit (which we estimate had a multibillion-dollar price tag) – were both divestitures that were scooped up for their ability to generate cash, not growth. While there could continue to be some profit-driven consolidation, private equity looks to be less of an influential player in this category as debt became more expensive in the waning months of 2016 and many of the largest firms have already executed sizeable take-privates in this category in recent years.

Amid an overall slowdown in IPOs, just one infrastructure management vendor, Apptio, debuted on one of the major US exchanges. Despite (and partially because of) that slow volume, there’s an appetite for growth that could be an outlet for infrastructure startups in 2017. With just 25% in annual growth in its most recent quarter, Apptio currently fetches 5x trailing revenue on the public markets.

What’s likely to lead to the next wave of M&A in 2017 is the growing dependence of businesses on SaaS and IaaS. According to 451 Research’s most recent Voice of the Enterprise survey, the share of respondents who said their companies use SaaS increased from 54% in 2015 to 63% this year, while those using IaaS were up from 33% to 39% – private cloud usage, on the other hand, declined in the same survey.

Those trends could push incumbents toward new technologies, or provide an opportunity for growth businesses to increase their footprint in infrastructure. However, few – if any – targets that specialize in cloud are likely to command the multibillion-dollar price tags that the software units of HPE and Dell scored.

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