Next Step in The Balance Sheet Shuffle

November 24, 2015

We frequently have customer conversations where we discuss how things are moving around a SaaS income statement;  hosting costs into COGS, headcount from R&D to other departments, things like that.  Meanwhile, in another part of The Cloud, there are some large, important blocks of capital moving between  a companies balance sheet.

The form of the capital is data centers, and they are starting to move between different participants in different segments.  It seems that telco companies that were investing large amounts building physical data centers are starting to question this use of capital.  This article does a good job of quickly summarizing who's selling, and who might be buying.

I question the conclusions that Peter Judge reaches, however.  He suggests a large consolidation is coming, and that the players will be focused on driving costs even lower than they already are.  I agree that a large re-shuffling of the balance sheet is coming, because of the return on capital they are providing to their current owners is not up to expectations.  However, I don't believe that the "economies of scale" will be the sole business model.  I think that there will be multiple winners, and the big wins will be to new owners that apply different business models that generate greater value.  Sure, we will probably see models that resemble Walmart, but I think that there is differentiation coming where there will be Target and maybe Tiffany or Gucci models competing in new segments.  Schnieder Electric is already trying a micro data center model.  This will not be the last experiment.

SaaS companies should keep an eye on the activity in this space, looking for signs that either expenses or quality of service are being negatively impacted with transfer of ownership.  Over a longer time horizon, SaaS companies should also be looking for emerging segment differentiation that provide a better value-fit for their particular business.

(This certainly sounds like a good time to be a transaction banker in this business segment, though!)