Cloud Bidding Wars And The IT Solution

If you're Hewlett-Packard, and the acquisition target is 3PAR, it's $2.35 billion up front -- or about five times 3PAR's total annual revenue for the past five years combined.

The battle for 3PAR between HP and Dell is only the most visible recent indication that valuations for companies that provide either hosting infrastructure or remotely hosted applications are reaching the same level we saw 12 years ago for any company that had "dot com" somewhere in its name. At least 3PAR, as a company, was debt-free at the time HP closed the takeover late last month.

Increasingly, big hosting companies that provide infrastructure for "cloud computing" are sinking deeper into debt. Much of this debt is financed by bonds that are either at, or near, junk status, and some of these companies are barely able to pay their quarterly debt service without cutting into operating cash.

One company, SunGard (which is $8.3 billion in debt), said earlier this year in a filing with the U.S. Securities and Exchange Commission that some big customers of its Availability Services unit are declining to renew contracts, in part because these customers can simply provide their own infrastructure, in house, for cheaper.

What does that mean for the IT solution?

It means this: Increasingly, best practices in evaluating a cloud solution should include the vendor's own financial strength. Moving a large portion of an enterprise's information technology from an in-house data center might seem like a great cost-saving idea -- until a host company files for Chapter 11 and many customers suddenly become creditors. Sound far-fetched? Think back to 2001 and a company called Exodus Communications, which provided Internet hosting services and, just as it was readying what today would be called a lineup of "cloud computing solutions," it went four-feet-in- the-air, filed for Chapter 11 and was sold off in parts -- mostly to Cable & Wireless.

Even in the months and weeks before the company began reporting unexpected losses, conventional wisdom throughout IT and Wall Street was that it had a "can't-miss" future. Well, it missed. The cost of carrying customers who had trouble paying their bills, along with the cost of keeping up its infrastructure, paying debt service and living up to its covenants proved too high.

In the case of Exodus, customers stopped paying because they ran out of money. SunGard is experiencing customers who aren't paying it any more because they can do it themselves cheaper.

This is not a prediction of bad things facing the "cloud computing" space. There are many great companies with great business models and nice flexibility -- companies like 3PAR that are leaders in their segment. But when you're kicking the tires on new companies racing toward the cloud gold rush, take a look at the books too. It's not just the speeds and feeds, and monthly pricing model, that may ultimately count in the end. It's a matter of whether or not the company is the next Pets.com.

E-MAIL ED MOLTZEN AT [email protected]