On January 3rd 2019, Cloudera completed the merger of equals with Hortonworks creating the worlds first enterprise data cloud and kick starting their ambition to provide the worlds leading next generation data platform. Below is a decomposition of this merger of equals and my personal analysis of this transaction.
Background
Cloudera (NYSE: CLDR) is an enterprise grade “Platform-as-a-Service” (PaaS) that enables organizations to be data driven through a set of machine learning and analytics capabilities optimized for the cloud. As a provider of both cloud and on-premise software solution they are leaders in providing open-source software and implementations for “Big Data” analytics specifically on the Hadoop Platform. 1 Major public cloud providers such as Google Cloud Provider, Amazon Webservice and Microsoft’s Azure dominate the “Infrastructure-as-a-Service” market share and Cloudera’s platform can run on all three providers enabling their customers multi-cloud strategies. Cloudera primarily focuses on large corporations and public sector companies and has over 1,200 customers. According to 2018 data, Cloudera employed over 1,600 employees in the US and internationally. Although, Cloudera is a leading in providing these capabilities it is worthy to note that since the founding of the company in 2008 they have incurred net losses of $385.8M. These losses are due to their capital investments to acquire new customers, commercialize their platform and participate in the open source software community in the early phases of their existence. The company expects to continue to experience net losses in the future due to investments in R&D, Sales and Marketing and the expansion of their infrastructure.
Hortonworks (NASDAQ : HDP) is the leading contributor to the open-source “Big Data” analytics platform Hadoop. They are also a leading enterprise-grade data management platform like Cloudera. Hortonworks has been known for their consulting expertise around their Hadoop distribution as well as their industry expertise in edge computing. Edge computing is computing that is done at or near the source of the data (i.e. smart watches, smart phones, IoT devices, etc) instead of in a centralized cloud on AWS, Azure or GCP. The more processing your local device can do on its own without making a round trip to the cloud the faster and better your experience will be. Hortonworks was founded in 2011 by venture capital from Yahoo and a company called Benchmark Capital.
Drivers
These two companies are both trying to meet the need of a growing demand of enterprises seeking to leverage new technologies to collect, store and access high volumes, velocity and variety of data in a cost-effective manner. Both companies have very similar product offerings and services to can accelerate their customers organizations to do this faster. Powerful synergies are the primary drivers of this merger both in revenue and cost. For revenue, there are differentiated and complementary products that increase cross-sell opportunities as well as complementary vertical strengths of offerings such as their core focus on open source Hadoop distributions. On the cost side, joined R&D will provide efficiencies while combined corporate function efficiencies and best practices among support and services of their products will also drive down costs. Furthermore, as threats of the major public cloud providers such as Amazon, Microsoft and Google develop their own native data analytic platforms on their infrastructure the need for joining forces and developing a best-in-breed hybrid solution becomes more and more important for both Cloudera and Hortonworks survival. In the words of ancient Klingon proverb: “The enemy of my enemy is my friend”2. Cloudera has a strong competency in machine learning and artificial intelligence while Hortonworks strengths lie in their focus on “Edge” computing and IoT (Internet of Things). With the merger of these two companies you bring the power of these two strengths to market with a focus on confronting their mutual enemies by delivering hybrid big data storage and processing to market in an accelerated manner, something that the big cloud providers (AWS, Azure and GCP) can’t do. Although, this transaction is a merger of equals, it does appear that Cloudera is driving the merger given that they will retain their CEO as the head of the new company and the fact that they already have an existing enterprise data platform which could be expanded with the use of Hortonworks edge computing expertise they have a strategic need for Hortonworks.
Proposed Date for Merger
On October 3rd, 2018 Cloudera and Hortonworks formally announce a planned merger to create the worlds leading next generation data platform. The transaction completed 3 months later on January 3rd, 2019 according to the press release on the Cloudera company website 3.
What is it? Merger? Acquisition? Spin-Off?
The Cloudera/Hortonworks merger is what is considered a “merger of equals”. According to Investopedia, when two companies about the same size come together to form a single new company it is called a merger of equals. In the case of Cloudera/Hortonworks merger the company’s shareholders will surrender their shares of their respective companies and receive new shares issued by the single company which is now Cloudera. After the merger, the CEO of Cloudera Tom Reilly will remain the CEO of the new company while there will be five designated Cloudera board members and four designated board members from Hortonworks. After the merger, the new company will have a combined trailing twelve-month revenue of $720M and a combined customer base of 2,700 customers with very little overlap.
Is it a strategic or financial deal (or both)? Why?
This all-stock merger is mostly strategic by nature but partly financial given that the synergistic nature of the two companies will give them a great opportunity to expand their presence in the data analytic and big data market. When you look at the financials of this merger, both companies have a history of low growth revenues and quarterly YoY growth, you see both companies’ revenue growth has decelerated starting in 2018. This lack of revenue growth coupled with high expenses could potentially be mitigated by combining the company’s customers and revenue streams while sharing the R&D and corporate functions to gain cost efficiencies. The integration costs would be low because both companies use the same core product (Hadoop) and can expand into new customer spaces by leveraging Hortonworks strengths in edge computing and Cloudera’s expertise in machine learning and data analytics.
What’s the motivation behind the deal?
Both companies recognize that together they can be a stronger more strategic force in the open source data platform ecosystem. The management team points to over $125 million in cost synergies from combined R&D, operational costs and the fact that the core product is the same platform (Hadoop). Both firms are motivated by the following:
• Growth of the AI/ML and Data Analytic market is set to grow annually by 21% over the next 3 years and by combining the companies they are positioned to scale their business and grow their revenues.
• By combining the unique strengths of each company (Hortonworks edge computing and Cloudera’s Machine learning and AI expertise) as one single firm they can focus on their goal of bringing edge computing to artificial intelligence.
• The threat of the big 3 cloud computing giants (AWS, Azure and GCP) developing their own native data processing platform in their own clouds is eminent and by combining forces they are positioned to compete if not dominate the data and analytic processing market with their hybrid offerings.
See the below figure which shows the potential growth of the AI/ML Data and Analytic Market for the next 3 years. As you can see in the figure below, it’s expected that transformative markets such as Cognitive / AI, Advanced Analytics and Dynamic data management are expected to grow to $83B in the next 3-4 years. 4
How was the deal financed?
The deal was completed as an all-stock merger of equals where the combined equity value of the merged companies is $5.2 Billion US with a combined revenue of $720M post-merger. According to CNBC.com, the terms of agreement are that Cloudera stockholders will own 60% of the equity of the combined Cloudera while the remaining 40% will go to Hortonworks stockholders. 6 This tax-free, stock for stock merger will provide Hortonworks shareholders one share of stock for each 1.305 share of Cloudera stock. The following figure shows the scale opportunity for the merger on day one.
Update on the transaction
When the merger was announced back in early October 2018 stocks surged by 25%. The news that two very similar companies who both operated with net losses coming together to take advantage of the synergic nature of their companies was enough to gain momentum on the news. Since then, the stock is down to 13.56 USD per share. It’s only been a little over 1 month since the deal was closed on January 3rd 2019 so it is hard to tell if the strategy for the merger is going as expected. Quarterly earnings report for Q1 will show progress. However, on February 13th, 2019 Forrester announced in their annual “Forrester Wave” report that Cloudera was named leader for their Hadoop and Spark platforms which in the company’s perspective reinforces the rationale for the merger between Cloudera and Hortonworks.
References
1 Cloudera 10-K, 2018, http://d18rn0p25nwr6d.cloudfront.net/CIK-0001535379/fd0d7eaf-9285-446e-820a-2a37d6774552.pdf
2 Behind the Cloudera Hortonworks Merger : The Enemy of My Enemy Is My Friend” accessed October 8th, 2019, https://www.lightreading.com/enterprise-cloud/data-strategy-and-analytics/behind-the-cloudera-hortonworks-merger-the-enemy-of-my-enemy-is-my-friend/d/d-id/746634
3 Cloudera and Hortonworks Complete Planned Merger, accessed January 3rd, 2019, https://www.cloudera.com/about/news-and-blogs/press-releases/2019-01-03-cloudera-and-hortonworks-complete-planned-merger.html
4 From the Edge to AI, accessed October 3rd, 2019, http://investors.hortonworks.com/static-files/dc2a9470-beed-44b9-a2ab-977f4dbbeb31dat
Bluescoder I/O 
Leave a comment