Technology M & A Report Summer 2016

 

It is my most sincere hope that all of our readers are enjoying their summer and had a great 4th of July holiday celebrating our country’s 240th year. It is hard to believe that we are 10 years from the quarter millennia mark.

While there are certainly numerous news-worthy happenings that could be providing significant economic headwinds (Brexit, the impending issues associated with Basel 3, terrorist attacks, a presidential election, a world-wide slow down led by China, a yield curve calling for a recession, etc.), statistics for the tech industry show that deal count has remained fairly consistent, valuations remain robust, the markets are up from their levels of 12 months ago, cash balances remain high and company profits remain robust. At Sikich, we continue to see robust activity and have been speaking to numerous companies seeking to transact within the next 12 to 18 months.

As always, we hope you enjoy this newsletter. In this edition we are spotlighting an article written by Jack Bouroudjian and provided by Bill Hayes, head of business development at UCX (Bill@ucxchange.com) about a new way for companies to buy and sell computing assets like bandwidth, including RAM, computational power.


In this issue of the Technology M&A Report from Sikich Investment Banking:


The World’s Next Great New Asset Class

by: Jack Bouroudjian

One of the highlights of my career was sitting on the board of directors of the CME Group and meeting some of the greatest minds in the world. There were senators, congressmen, Leo Melamed (the father of financial futures) and Nobel laureates. Among them was the late Dr. Merton Miller, winner of the Nobel Memorial Prize in Economic Sciences (1990), who took a liking to me for my free market attitude. One particular discussion will live with me forever: Upon the proliferation of the internet he said, “Jack, my boy, I don’t get it. Aside from information what good is this internet?” Then he added, “But then again what do I know...Remember, when the steam engine was created, it was for pumping water out of coal mines. No one thought it would be useful for anything else!” If Dr. Miller were around today, he would see the internet evolution from information to communication to value. The growth of how compute processing power is consumed, from main frames to private infrastructure to the cloud has opened our eyes to the power of combining systems, devices (IOT) and applications all across the globe forming new and more powerful entities. A refrigerator can show you that it’s time to buy milk, you can order dishwashing detergent from a button on your washing machine, you can give your dog a treat while you’re sitting anywhere else in the world.

Consumers, without question, are benefitting greatly from the cloud and access to anything from anywhere. Clearly it’s an exciting time to be in the business of creating “mash-ups” of devices and software to accomplish new cultural norms. We are no longer concerned about the traditional computer/server. It’s now assumed that compute power exists and can be accessed anywhere at any time. Failure of components and downtime are becoming things of the past. Simply put, compute power has become commoditized. Compute, in its most basic form, is comprised of CPU, memory, disk space and network. The combinations of these different components can produce a variety of different outcomes.

Traditionally we thought of a computer as a box filled with components that it needs to run software. CPU, memory, disk and network were all connected by physical circuitry. Today we have effectively replaced this physical circuitry (BUS) with message queuing. Effectively, protocols and ports have replaced copper and soldier. RabbitMQ, Amazon’s SQS, ActiveMQ are just some examples of software that has matured to allow BUS-like communication across software component. It now matters less that computers are co-located and more that they can reach each other to transfer information at incredible speed. Processing and storage can be spread throughout the globe rather than confined to a box, closet or basement. Hadoop, and others like it, make it possible to assume the data and compute exists (somewhere) to execute a given workflow.

Compute and digital assets are the World’s next great commodity sector. Imagine trading compute futures alongside corn and pork belly futures. Derivatives and packages of asset classes are nothing new in the world of finance. However, stripping the computer of its physical encasement and packaging its componentry as a valued commodity is new. Like a recipe in any restaurant, we can now build our infrastructure with little attention paid to the vendor supplying it. The components and their attributes (reliability, scalability, etc.) now stand on their own for consumption. Imagine customizing an application platform by simply understanding its requirements (CPU, Memory, Disk, Network) and not necessarily caring about who will supply that. Think about it: do we care where our electric comes from? Isn’t it enough to know we can power our devices? It matters more that our electrical service is clean, consistent and available at all times, which sounds like an application service level agreement.

If this sounds like trivializing the need for security, high availability and the plethora of other important features of an application, it is. Just about everything we need to add to compute to make it a viable platform today is available as a service, or will be soon. Need better reliability and/or scalability, strap on Docker and the compute environment can come and go as it pleases. Technologies like HA Proxy and Docker (as well as other container suppliers and managers) ensure that the compute can fluctuate and not cause interruption. If you’re insulated against the potential for failures, and your applications can move around the internet ubiquitously, then why lock yourself into a vendor? There has been a quest to find the latest in cybercurrency. Now we can match that with cyber-assets. I am suggesting that just about any technology or method that can be used to architect, build and release an application to the market can be abstracted to form a marketable service and therefore it can be traded as an asset.

How does this benefit us? Just like everything else in the free market, price discovery and fluctuations can introduce arbitrage and give us a more stable understanding of what our compute and any other feature actually cost to run and maintain. The days of RFPs and cost estimation, followed by budgeting for CAPEX and OPEX, are reduced to self-service. The pricing is guaranteed to be fair because the market is fair. Therefore, we can move past the differentiators that come with infrastructure and focus more on upfront application value.

Look at companies like Cognizant who are clearly thinking this way and taking what they assume exists (infrastructure) and building platforms quickly. They don’t seem concerned with how the application will run anymore; value to the customer is more important. The companies competing in this new space are those willing to build catalogs of services and rely on them heavily. They are pushing the large scale enterprises that offer consumer services, to think about how their clients behave and how to integrate with their lives instead of disrupting it. Leaning on technology from Apache (Mesos) and Google (Kubernetes) we see the World’s compute assets becoming unified and federated. Applications are turning into molecules (like water or air). Consuming the applications will become as natural as breathing. You won’t interface with a computer, website or phone; instead you will live within the environment created atop the services that you once knowledgably interacted with. Trading electricity and water (as Michael Burry depicted in The Big Short) are commonplace today. As synthesized as it is, compute is on the same trajectory.

So as we witness the maturation of compute power, from information to communication to value, one of the end results will be value transfer. Value transfer is exactly what it sounds like, ‘real time’ transfer of value. Even more important; once value can be transferred efficiently, securely and standardized (Much like blockchain technology) the world will change forever. The cloud, and all the compute resources that make it possible, will be the epicenter of everything. No doubt, this is the next great commodity. But then again what do I know? To paraphrase Dr. Merton Miller, “After all, the internet was created for information, who would have known it would turn into_________ ” If the good Doctor were around today, he would tell me to leave the sentence unfinished…The possibilities are endless!

Jack Bouroudjian is CEO of Index Financial Partners, a three-term director of the Chicago Mercantile Exchange Group and founder and advisor of UCX (Universal Compute Exchange). He is also a CNBC Contributor. Follow him on Twitter @JackBouroudjian.

Andy Anderson is an accomplished senior dev-ops architect with expertise in infrastructure and platform technologies deployed over public and private cloud services. His company, mydev-ops. com, offers consulting on designing and implementing continuous integration solutions via automated processes to support dynamic configuration management


Good News in Technology: Some interesting tech and science stories you may have missed

 

A team of researchers at Stanford University recently used stem cells to help stroke victims regain motor functions. While this research is still in its early stages, the outlook is encouraging: in one case, a 71 year old stroke victim regained use of her arm when she could only wiggle her thumb before the treatment.

A new spinal implant that uses both electrical and chemical stimulation has been created by scientists in Switzerland that has shown success in rats for treating paralysis caused by spinal cord damage. Human trials should begin soon.

An Icelandic company, Orkuveita Reykjavíkur, is developing a procedure called CarbFix that will enable the storage of CO2 by causing it to take on a rock-like form. The process involves exposing basalt to CO2 and water. The result is a chalk-like substance that contains the CO2 that ordinarily would be emitted into the atmosphere.

Iowa State Researchers recently developed a proof of concept paper-based microbial fuel cell that used capillary action to guide liquids through the system. This effectively eliminates the need for an external power source to run the fuel cell.

Scientists recently confirmed that the hole in the ozone layer over the South Pole that had been created by the use of CFCs has begun to shrink. This finding is encouraging to many scientist that are concerned about climate change as it implies that mankind can make changes (like the ban on CFCs in the 1980’s) that can have a positive impact on our environment.

MIT researchers announced the development of an easily customizable vaccine. This new vaccine could allow for rapid deployment to combat disease outbreaks within a week’s time. This is far faster than the current time required to create and deploy vaccines to combat outbreaks.

More than 3,200 planets have now been discovered outside of Earth’s solar system. Most of these discoveries have come from the Kepler Space Telescope over the last couple of years. Only about 0.25 percent of the sky has been scanned to this point.

Tests performed by scientists at the Imperial College of London and the University of Glasgow strongly suggest that a new supplement helps users to reduce cravings for high calorie foods and lose weight. Volunteers were given a supplement, inulinpropionate ester or a placebo in milkshake form. Those receiving the supplement showed much less interest in high calorie foods and lost significantly more weight than the placebo group during the test period.

In May, Portugal operated on 100 percent renewable energy for more than four days. Portugal typically produces about 48 percent of its power from renewable sources.

Australian engineers recently developed photovoltaic cells that are 34.5 percent efficient. This beats the previous record of 24 percent. The theoretical limit for photovoltaic cell efficiency is 53 percent.

 

 

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Kurt Estes

Director,
Sikich Investment Banking

Contact:

Ph: 312.648.6665  |  Email

 

Securities are offered through Sikich Corporate Finance LLC, a registered broker/dealer with the Securities and Exchange Commission and a member of FINRA and SIPC.

This document is a result of the efforts of Sikich Investment Banking (“Sikich”) and is for informational purposes only. It is not intended as an offer or solicitation with respect to the sale or purchase of a security. The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Sikich. Sikich shall not be liable for damages resulting from the use of or reliance upon the information presented herein.


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