Is Cloud Comm M&A about to surge? Don’t ask me.

Perhaps my ability to predict M&A activity is not great. I know; if it was, I’d probably be long retired. Still, in the last 10 months or so since I wrote on the subject I have – on more than one occasion – sensed momentum growing. We’ve seen fits and starts, but no real momentum. And plenty of good properties still listed (every thing has a price, For Sale sign, or not).

One may still argue that deal flow is coming, a culmination of a perfect storm that has brewed for years. We’ve seen plenty of venture money, promised land-chasing entrepreneurs willing to live off early-adopter scraps for years, and now cash-rich legacy providers now finally ready to jump in the pool. Put all these together and you get M&A friendly conditions. Throw in a bunch of private equity guys looking to back inevitable roll-ups, and you might even get a frenzy out of it.

But alas, no frenzy. For now. In 2009, buyers sniffed but sellers – notwithstanding the Great Recession and cash stress – mostly chose to hang on for dear life. in 2010, things loosened, end-users finally moved their phone systems to the cloud in earnest and in Q4, deals got done. Nothing huge in terms of cash value, but instead combinations (ie. CBeyond and Aretta) that validated for many that this segment was for real.

Then in early 2011 things went a little quite. Not in the background; actually there was more sniffing going on than on an average evening at the dog park, but announcements were few and far between. Earthlink picked up Miami-based STS for an undisclosed amount, but if nothing else further solidified CLEC’s as buyers in rounds to follow. CLEC’s often bring an SMB customer base, a strong agent channel and an appetite for growth through higher margin, less commoditized offerings. This spring TelePacific bought Telekenex, a provider of hosted voice but also rich data communications. Per the formula above, TelePacific’s deep channel and market reach should make the most of this.

Enter SmoothStone – the star enterprise student in cloud comm – announcing that it had been acquired by West. This was interesting and exciting but also a stop-buyers-and-sellers-in-their-tracks type of moment. West, who had already showed a penchant for cloud comm with an earlier deal for Holly Connects, apparently (unconfirmed back-channel chatter only) paid as much as 3.5 times revenue for the company. Great news for SmoothStone; not so great for buyers thinking this was still a buyers market. Surely true that SmoothStone had built very unique and incomparable value by being one of the only providers to really crack the enterprise market, but still, the math seemed to be changing.

After that, traffic slowed. We’ve seen smaller, albeit strategic transactions by regional companies including IP5280, Telovations and Momentum, but not the flood one could have convinced themselves to expect (like maybe yours truly). But this week, we’re told about Alteva – another strong, regional BroadSoft powered provider – being acquired by Warwick Valley Telephone (who?) for $17M, in cash. This article’s head twisting math suggests that this deal too could be north of 3 times revenue. Alteva too succeeded in higher value deployments, but I would have never guessed a rural phone company would value that. Yet, they do qualify as a legacy providers looking to get in on what’s next, and I’ve proven an underperforming clairvoyant.

So now what? Who knows. What’s true is that the conditions are improving by day. Cloud comm providers of all kinds are adding real and valuable customers every day (not just for hosted voice; the video guys are players now too). The chess game among cash-rich buyers like legacy SP’s and providers of complimentary services is intensifying. And the private equity guys have not yet left the bar. One more time….stay tuned.

Tagged as: Alteva, Broadsoft, Cloud Comm, M&A deals