Cloud Provider M&A Due Diligence
One of the world’s largest sovereign wealth funds retained Citihub to advise on a proposed investment in a domestic cloud and managed services provider. This was the first such investment the fund had considered, and the management team felt that they needed support to understand the technologies involved and the dynamics of the global, regional and local market.
How Citihub Helped
Citihub began by performing a high-level review of an investment memorandum that had been produced by a global investment bank. The team then educated the fund management and legal teams about IT services, cloud technologies and how they are being adopted across both mature and developing markets. This included an examination of the drivers and barriers to adoption for different end-user communities. The Citihub team then focused on the proposed provider. They conducted detailed due diligence of all aspects of the provider’s existing asset base, delivery capability, customer portfolio, sales and marketing capability, sales pipeline and financial data.
The findings were documented and the outputs and observations were used to further critique the provider’s investment memorandum and proposed strategy in a written report. Using pre-existing market intelligence (produced by the Citihub Data Centre Intelligence Unit) a joint Citihub and client team constructed a detailed financial and scenario model based on a series of adoption outcomes across the provider’s service stack. This model was then used to assess the affordability of the proposed financing and the risk to the fund as the lender.
Informing the right decision
The fund management team ultimately concluded that the transaction was not viable and that investment funds would be at risk. Prior to Citihub’s involvement, the transaction had been viewed favourably. Citihub developed a series of indicators and thresholds, which the fund management team could use to gauge changes in the maturity of the market that might affect the viability of the investment in the future. A series of suggested improvements were also passed to the provider by the fund manager to help accelerate the provider’s business and meet thresholds for future investment.
Understanding the market
The fund management and legal teams were quickly educated to the appropriate level of detail in all aspects of the IT services business and its underlying economics – along with a solid understanding of the drivers and barriers to outsourcing and cloud technologies. In the case of this transaction, the fund management team benefited from understanding the relative immaturity of the local market and of the provider’s capabilities. Additionally, Citihub’s market intelligence helped the client team to challenge financial assumptions and growth projections in both the investment memorandum and the detailed financial model. This proved crucial to the client’s decision not to pursue the transaction.
Understanding asset quality
Citihub’s due diligence highlighted serious concerns with the provider’s data centre assets and their capability to deliver the cloud services that underpinned their growth strategy and financial projections.
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