COVID-19 has spared no one in its rampage. Globally, it has consumed lakhs of people, shaken governments, wounded businesses and upended existing systems in its wake. Such has been the economic loss due to the lockdown imposed to tackle this invisible and invincible enemy that the International Monetary Fund has christened the lockdown the “Great Lockdown”, a reminder of the Great Depression back in the 1920s.
Unfortunately, this Great Lockdown is not completely behind us. Governments are being compelled to impose fresh lockdowns time and again. Consequently, life has come to a staggering halt and so has the economic activity. In absolute terms, each industry has witnessed a decline in its revenue. However, there is one which has relatively fared better – the IT industry. Demand for some IT services like e-commerce, ed-tech, gaming, online streaming, video conferencing, cloud computing and security has spiked exponentially and would continue to grow, at least in the near term. Just as the technology sector weathered the recession of 2008, it has been doing the same now. Moreover, its relative resilience can not only be seen in the revenues but also deal-making. That’s because unlike in 2008, there is enough liquidity and cash right now but the risk-averseness has increased making investors take safer bets on sectors like IT. Though technology deal volume and value did dip in the period between Jan and March 2020 compared to the same period in 2019, but only by 15% and 2% respectively—against a backdrop which saw falls of 35% and 39% to overall global M&A volume and value. Even during the April-June period, there were several sizeable deals. Some of the biggest ones were Microsoft’s announcement to buy UK-based firm, Metaswitch Networks which specialises in virtualised, cloud-based communications software, Google’s announcement to buy ThousandEyes which provides cloud-based analytics tools for internet, local and wide-area networks, Zoom’s acquisition of end-to-end encryption specialist Keybase, investments in Jio Platforms by several players, Facebook being the largest one with the largest piece (9.99% stake) and Facebook’s acquisition of Giphy, a GIF-sharing business.
Coming to the question at hand which is will the firms which offer services in the field of cloud computing and data analytics be able to grow due to increased demand post-COVID or will they be acquired by larger firms for their technology, it is imperative that I first throw some light on the words “post” and “acquisition” before answering it.
No cure has been found for COVID-19 so far. Scientists all over the world are racing to find a suitable vaccine or an anti-viral drug but evidently, it is taking time, owing to the nature of the virus which has no single set of symptoms or an incubation period. Hence, no one knows when the “post” would come.
Secondly, an acquisition is not necessarily bad. It is generally a good thing in which both seller and buyer benefit. The seller gets to have an honourable exit, expand to new markets, get access to more capital or get more exposure while the buyer gets access to more customer segments, newer capabilities and expand his portfolio of products and services. Another point to note is that acquisitions can happen both, when the business is doing well and when it is not.
Having established this, for most start-ups and small companies, surviving this crisis is paramount because the “post” seems far away and till then, their cash reserves may dry up. In such a scenario, they would have two options, either to shut shop or get acquired and still be able to run their business. A survey of more than 1,000 tech start-ups in 50 countries by Startup Genome, a global policy advisory company focused on new tech companies, found that just under a quarter of the businesses polled did not have sufficient cash reserves to survive past September of this year, with another 21% unlikely to survive beyond March of 2021. More than a quarter of respondents (26%) reported a drop in revenues of between 60% and 100%, with a third saying that they saw funding rounds cancelled or funders going silent. Nearly two-thirds of the companies surveyed have seen funding plans disrupted because of COVID-19.
As for small firms which provide data analytics and cloud services, the growth in data analytics services has taken a hit while the growth for cloud services has increased. Data analytics aids businesses to become more efficient and on average, can increase sales by 5-6%. In a favourable business environment, firms want to be as efficient as possible to gain the slightest market share but in a crisis like this where sales are severely hit and even became zero for passenger vehicles in April in India, survival rather than efficiency takes centre-stage. Therefore, there are chances that data analytics firms might shut down or get acquired during or after the crisis by bigger firms either as distressed firms or as firms with reasonable valuations (only if they do well financially), attractive to the buyer.
In contrast, cloud services firms have been performing better and would continue to perform well in the near term. One major reason is that cloud computing facilitates remote working. “The cloud has been absolutely essential and I really don’t know how we’d have coped without it. If we were still reliant on physical datacentres, we wouldn’t have been able to expand so quickly,” says Patrick Babic, service owner for the end-user computing team at energy giant Centrica. Scaling up of cloud is also important in e-commerce. Adam Taylor, co-founder of PetShop.co.uk says that his firm has been able to cope with unprecedented demand because of NetSuite’s cloud enterprise resource planning product. Microsoft Teams and Google Meet which fall in the category of SaaS, a cloud service, registered a whopping 775% increase in monthly users in one month in Italy and 25 times increase in monthly usage in March as compared with January, respectively. In light of this, a small firm offering cloud services can hope to survive the crisis and grow post it. An acquisition here would depend on the intention of the seller. If the seller gets a lucrative deal by a bigger firm which wishes to acquire it for its technology, he could take it and if otherwise, he could continue to grow his business on his own.
Summing up, an acquisition for such IT firms would heavily depend on their availability of cash and their business potential and performance during the COVID crisis. Times are uncertain and trying. No one knows exactly what the future holds for us. Nonetheless, predicting it based on past and present facts and trends is not a bad idea either.
Will the small cloud services and data analytics firm be able to grow due to increased demand Post COVID-19 or would they be acquired by larger firms for their technology?