Telefonica Plots Cloud, Cybersecurity Deals to Compete With IBM

Rodrigo Orihuela and Macarena Munoz (Bloomberg) -- Telefonica SA is plotting a wave of dealmaking in cloud computing and cybersecurity to gain the scale it needs to compete with pure-play IT services companies like International Business Machines Corp., Atos SE and Endava Plc.

The Spanish phone carrier is targeting double-digit annual sales growth for the technology business it split off from the rest of the company last month, Jose Cerdan, the division’s chief executive officer, told Bloomberg News.

“We are going to be buyers. We will look at acquiring medium-sized companies that fit into our business and help us grow more,” Cerdan said in his first media interview in the new role.

The priority is to bulk up in the areas where Telefonica already competes. “I’m not looking for a product -- I’m looking to grow,” said Cerdan.

Telefonica’s tech activities are far smaller than its shrinking legacy telecommunications business, but they’re growing fast. Revenue from cloud services increased by more than 20% last year, and cybersecurity sales rose 12%.

It’s one of several European telecom companies trying to extract more value from their non-core businesses and infrastructure to revive flagging share prices. Technology service providers trade at an average of 14 times their enterprise value to earnings before interest, taxes, depreciation and amortization, compared with a ratio of 5.7 for Telefonica, according to data compiled by Bloomberg.

The Telefonica Tech carve-out took more than a year and created a company whose main focus is helping corporations to migrate their IT operations onto big cloud platforms such as Amazon Web Services and Microsoft Corp.’s Azure. Telefonica can then sell its own services such as cybersecurity and big data analysis on top.

Many IT services providers that positioned themselves as resellers and aggregators of cloud services are struggling to hold their own as the biggest U.S. cloud platforms take a growing share of corporate IT budgets.

Telefonica sees a potential starting advantage over companies like Atos, Endava, Tata Consultancy Services Ltd. and DXC Technology Co. in its relationships with big companies that already use Telefonica’s phone and data services.

“Telcos benefit from our extensive networks and history,” said Cerdan, pointing to the company’s big presence in Spain and Brazil. “Our goal is to keep growing at double digits and we can do it perfectly, with no problem.”