Why Telstra’s $267.5m purchase of Versant is a very big deal for investors

Earlier this week, Telstra (ASX:TLS) forked out $267.5m to buy cloud computing Versant.

Given Telstra’s $40bn+ market cap, this may not seem that big a deal for the company – let alone for investors in other telco and tech stocks. But in our view, it would be wrong for investors not to take note of it, particularly those invested in telco and tech stocks with exposure to the IT services and Cloud markets.

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Why Telstra bought Versant

The company told its shareholders it was ‘to help scale its Telstra Purple tech services business, drive NAS (Network Applications and Services) growth and support the digitisation of businesses and Australian industry’. To put it simply, Telstra sees the Cloud is growing and it does not want to get left behind.

For the sake of investors who do not know Telstra Purple is a subsidiary that provides businesses assistance with digital transformation. Versant is a Melbourne-based company that offers AWS (Amazon Web Services) Cloud services. It was founded in 2012 and recorded $130m net revenue in FY23. It has over 500 employees in Australia, Singapore and the US and counts as clients logistics group Toll and building materials group Boral.

Many analysts have been quoted in media as saying that it would give Telstra a competitive edge over its peers and potentially make it a one-stop shop for businesses tackling digital transformation projects. This is indeed the case. But we think it isn’t only Telsra investors that should be excited about this deal.

Why investors should care

We think it could well be an indication for more M&A activity in the Cloud and IT services space. This ASX sector has seen its fair share of M&A deals. Empired (ASX: EPD) was bought out in November 2021 by Capgemini for $233m. Back in mid-2020, DWS (ASX: DWS) was bought by Indian IT services giant HCL Technologies for $161.9m. And only a month ago, Cirrus Networks (ASX:CNW) was bought out by listed peer Atturra (ASX:ATA).

We think this could be a good sign for small cap companies like Atturra (ASX:ATA) and ReadyTech (ASX:RDY). We wouldn’t be surprised to see either of them become targets. Even if they don’t, it bodes well for them and large cap Cloud and IT services stocks like Technology One (ASX:TNE) and Data 1# (ASX:DLT) – they may see growing demand for their services as the Cloud grows.

You see, it is easy to think that the transition to the Cloud is nearly complete. But the reality is the opposite. Goldman Sachs estimated last year that transition from on-premise systems to Cloud software is just 20% completed. It also estimated that annual revenues are US$235bn compared to enterprise IT revenues of US$1.4tn and the Cloud could easily grab that and even more from non-digital spending. So, there could be a lot of growth to come!

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