AT&T Acquisition of USi Adds to the M&A Mix

Posted on September 12th, by thinkstrategies in Uncategorized. 1 Comment

On September 12, AT&T announced it will acquire privately held USinternetworking, Inc. (“USi”), one of the early applications service provider (ASPs) pioneers, that has had a hard time maintaining a leadership position in a rapidly changing market.

Like Cognizant’s acquisition of AimNet Solutions earlier this month, this represents another transaction which is reducing the number of the original ASPs and managed service providers (MSPs) in the market. It also reinforces the trend among larger players seeking to expand their service portfolios via acquisition to become more strategic solution providers for their customers and channels for their partners.

Unlike the managed services concept which survived the bust and is now experiencing solid growth, the ASP model has never gained widespread acceptance for a number of reasons. In particular, ASPs positioned themselves as resellers of traditional software applications that are fundamentally flawed. These enterprise applications are often cumbersome to use and unable to fully leverage Internet connectivity. As a result, ASPs’ business benefits of accelerated application deployment without added the infrastructure investments were offset by the shortcomings of the traditional software applications they supported.

Aggravating the ASPs’ plight were the tremendous upfront investments they made in their service delivery infrastructures and showcase operations centers. This created tremendous cashflow problems for the ASPs that became compounded by the emergence of lower cost and more web-friendly software-as-a-service (SaaS) alternatives.

So why did AT&T decide to buy USi for 1.5-2x revenues?

It is hoping to retain a sufficient number of USi’s 150 enterprise clients in more than 30 countries to substantially expand its own hosting business. It also gains a stronger working relationship with USi’s independent software vendors (ISVs) including Ariba, Demandware, Microsoft, and Oracle/Peoplesoft/Siebel. And, it gains USi’s skilled support staff and facilities, as well as its experienced sales team.

Unfortunately, these ASP skills and relationships are quickly lossing their value in a world that is rapidly shifting to a SaaS model.

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