Cloudera and Hortonworks in $5.2bn merger, sign of things to come

Two cloud-based data specialists have announced a merger that will create what they claim is the leading next-gen data platform provider. The $5.2bn deal sees Cloudera and Hortonworks hook up, but very much looks like a sign of things to come – as the smaller players in a market team up to try and carve out a stake before the titans extinguish such hopes.

In this sector, those colossuses are the likes of Amazon AWS, Google Cloud, and Microsoft Azure. These companies have enough cash to buy their way into any market they like, and the massive channels to make signing up customers a pretty straightforward process. To this end, the smaller players need to find niches where they can become indispensable to customers, and then hope to climb the ladder based on a growing reputation.

Many of these smaller companies will have worked their way up from startup-scale, while some might have pivoted after reaching the largest size their niche ecosystem could support. However, many of them are only posting revenues that count as pocket change for the titans, which makes them easy acquisition targets.

With a snap of the fingers, a giant can buy up the bulk of one of these niches, and then leverage the new experience to integrate into its existing portfolio. Divided, these smaller companies are much easier to conquer. Whether it’s an acquihire, to snap up talent, or a more conventional market share acquisition, many of these smaller companies are doomed either to acquisition or to slow deaths as they run out of room in their core markets.

As such, the Cloudera-Hortonworks deal is a strategic move by two of the larger smaller companies, combining to create a company of sufficient scale that one of the giants can’t just waltz in, emptying out the bills in its wallet, and saunter off again. At $5.2bn, this is a much harder acquisition to make than buying one or the other at around half that figure.

The deal itself sees Cloudera take 60% of the combined entity, with Hortonworks having the rest. The board will initially be nine members, five of which are from Cloudera, with four from Hortonworks. A tenth will be elected at some point. Cloudera’s CEO Tom Reilly will be CEO, while Hortonwork’s CEO Rob Bearden will join the board. Chairman of the board will be a Cloudera rep.

That 60:40 split would value Cloudera at around $3.12bn, and Horton works at $2.08bn. Buying at a 30% premium, those would have been notably large deals in this area, but combined, that then comfortably strays into the ‘largest deal of the quarter’ sector.

The two companies had a decent amount of overlap, and so the combined entity should find itself in a stronger position. We anticipate some layoffs, as there will be some duplicate and redundant roles in the merged business, but the two main thrusts of each business are sufficiently different to make this seem like a pretty sensible deal.

Cloudera has focused on creating a platform that provides machine-learning analytics, to companies looking to create those highly prized ‘actionable insights’ from their vast stockpiles of data. Hortonworks is in the business of providing data management platforms and tools, again as a means to provide those valuable business insights.

To some extent, Hortonworks is concerned with lower layers of the combined stack, while Cloudera is playing higher up the chain. Cloudera says that some of the largest global enterprises are customers, including mining giant Komatsu,  while Hortonworks says that more than half the Fortune 100 use it. Both are major open source proponents.

Hortonworks was founded back in 2011, in California, initially funded by $23mn from Yahoo and Benchmark Capital – netting around $248mn in funding to date. Its name is a play on Horton the elephant, one of Dr Suess’ creations, as Hortonworks’ stack relies heavily on Apache Hadoop – an open source data processing tool, whose logo is an elephant.

The company IPO’d in December 2014, raising around $100mn, although it did not perform well in its early years. It apparently lost $87mn in H1 2014, and after buying Onyara in 2015, a secondary share offering in 2016 saw its share price fall to around half that of the IPO level. An overhaul was launched, and performance improved.

In terms of its share price, it looks like the announcement has triggered a ~23% increase – up to around $27 from $21.88. In the past year, things have been quite choppy, with a low of $16.52 in April. However, August saw the price jump from $17.01 to a high of $22.37, where it dipped again before climbing to $24.76 in September.

For context, the IPO debuted at $26.38, in December 2014, where it jumped around for a few quarters before dipping to around $21.90 in December 2015. However, the share price plummeted after the second share issuing, slumping to $8.43 in February 2016. Since mid-2017, things have been on the up.

Cloudera has enjoyed a similar post-announcement spike, up ~25.5% pre-market to $21.10 from $17.08. Founded in 2008, it has secured a lot more funding than Hortonworks, around $1bn to date, and is also a larger company – around 1,900 staff to Hortonworks’ 1,500, if LinkedIn is to be trusted.

The company held its IPO in April 2017, debuting at around $18.10. April 2018 was the low point, slumping to $12.98 following poor results, but by September, it had recovered to $18.57. In terms of market cap, Cloudera is worth around $2.58bn, while Hortonworks is around $1.78bn. Using those figures, it seems that they believe the combined company is worth around $800mn more than their current combined market caps – but the pair do mention annual savings of around $125mn.

But the onus is now on the new company to prove that it can be profitable. Neither company had much success here, and there’s a real need to show the investment community that there is money to be made in this world of big data, machine-learning, and analytics.

To this end, layoffs are one of the easiest ways to help stem the losses, but the bigger need is to convince enterprises that the joint offering can save them money, and is therefore a necessary service. Turning raw data into useful business information, that customers can then act upon to boost sales or improve efficiency, is the product here.

Of course, if things don’t go to plan, the likes of AWS, Google Cloud, Microsoft Azure, or even companies like IBM, SAP, and Oracle, could slide on in and acquire them on the cheap – if investors lose confidence in the viability of companies so reliant on open source technologies. The open source community will be praying that Cloudera and Hortonworks can turn things around.