The so-called Internet cloud sector, where software and applications are delivered via the Web, got a huge boost this week when SAP (NYSE:SAP) agreed to plunk down $3.4 billion for SuccessFactors (Nasdaq:SFSF). Using the cloud lowers costs because there is no need to invest in infrastructure like servers. There are also immediate updates and access to real-time information, since the databases are centralized.
But will this new takeover interest help the IPOs of cloud companies as well? Perhaps, but investors should be careful. For the most part, the cloud space is highly fragmented and competitive.
Take GlassHouse Technologies, for example. In 2007, the company filed for an IPO but pulled the offering because of the financial crisis. Two years later, GlassHouse tried again, but it couldn’t gin up enough interest and the company just pulled its deal on Tuesday.
GlassHouse is a solid company — it has a system called Transom, which is a blend of consulting and software tools that help improve datacenter operations. The focus is on leveraging information technology assets, improving service levels and finding cost efficiencies. GlassHouse has roughly half of the Fortune 500 as customers.
And the company has been growing at a nice pace. For the six months ended June 30, GlassHouse’s revenue grew to $65.5 million go from $48.3 million. On the other hand the company lost $20.9 million.
But with that revenue growth, why was there such a lack of interest in the deal? One issue is likely the company’s heavy reliance on consulting. This can be a tough business to scale. Plus, there are other huge consulting firms moving into the cloud, such as Accenture (NYSE:ACN).
At the same time, investors also want to see a cloud company that has a platform, meaning the software spans many industries and provides core functions, which makes it easier to lock in customers. This is what SuccessFactors built.
Interestingly enough, the platform strategy has been a key factor for another upcoming IPO company called Jive (it’s planned for next week). It has developed a “Facebook for business” – software that helps with sharing documents and status updates to get better performance from projects.
The SAP-SuccessFactors deal will likely provide a nice boost to Jive’s expected $8-$10 pricing range. In fact, it could be enough to give the company a billion-dollar valuation when it hits the market.