Merger & Consolidation Case:

AZURE AD

S
ix months into his new job as a partner, Alex Chen was
meeting with Justin Lee, the Founder of BlueSky Equity
Partners, a mid-sized private equity firm based in San
Francisco. Alex was recently assigned to lead potential acquisition
of two tech companies specializing in Azure AD services: Tech
Solutions (TS) in Texas and CloudMakers (CM) in Florida. BlueSky
has identified the growing demand for cloud integration and
identity management solutions. With the rise of remote work and
hybrid cloud infrastructure, demand for Azure Active Directory
(Azure AD) services has surged. BlueSky was looking for
opportunity to consolidate smaller businesses that focused on
providing services to Azure AD clients and anticipated to selling it
to a large IT service provider or take the combined entity to an IPO
in the next 3-5 years.

Justin: I hope you have settled in well. This new investment project
is a great opportunity to prove yourself in the firm.

Alex: Thank you, I am very excited to be leading this project. I have

access to the key documents for both companies, including recent
financial statements, customer engagement data, and Azure AD
service performance metrics."

Partner: Perfect! We're expecting your analysis on the potential of

these acquisitions for our committee meeting next week.

Alex: I look forward to

Azure AD – Platform Overview:

Azure AD has become integral to secure identity management for

businesses of all sizes. Companies that provide expert
implementation, migration, and support services for Azure AD are
experiencing high demand. Key growth drivers include:

1. Remote and Hybrid Work: Accelerating the adoption of

identity management solutions.

Merger & Consolidation Case: Azure AD 1

2. Cybersecurity Needs: Increasing demand for advanced
security features.
3. Compliance Regulations: The need for businesses to comply
with data protection and privacy standards.
4. Cloud Migration: Companies require seamless identity
management integration.

Opportunities in the industry:

1. Growing Demand for Cloud Security & Id Management:

As more companies adopt cloud and hybrid work
environments, the demand for robust identity and security
solutions, like Azure AD, is skyrocketing.

2. Expansion into Mid-Market and Small Business Segments:

Many SMBs are moving toward cloud-based solutions,
presenting an untapped client base for Azure AD service
providers who can offer scalable solutions at competitive
prices.

3. Strategic Partnerships and Integrations:

Leveraging partnerships with Microsoft and other cloud

providers can create additional revenue streams and
opportunities for bundled service offerings.

4. New Market Development in Emerging Regions:

Growth opportunities exist in emerging markets where

cloud adoption is increasing. Expanding to regions with
significant IT infrastructure investments can drive
international revenue growth.

Summary of risks identified by various analysts:

1. High Competition and Pricing Pressures:

The industry is competitive, with pricing pressures from
other identity management providers. This risk impacts
profit margins and may necessitate ongoing innovation
and value differentiation.

2. Data Privacy and Regulatory Compliance:

Changes in data protection regulations, such as GDPR in

Europe, can affect how companies manage identity data.
Merger & Consolidation Case: Azure AD 2
 Compliance costs and risks of penalties are considerations
for companies in this space.

3. Talent Retention in a Competitive Labor Market:

Retaining skilled cloud and identity management

professionals can be challenging due to high demand,
impacting the cost of services and service continuity.

4. Technology Evolution and Dependency on Microsoft

Azure:

Rapid changes in technology or shifts in Microsoft’s

platform strategy could impact Azure AD services. Staying
updated on technology advancements and adjusting
services is critical.

The Target Companies

• Tech Solutions (TS): Founded in 2015, this Texas-based

company focuses on Azure AD deployment for medium and
large enterprises. Known for its high level of customer
satisfaction and technical support, TS has a team of certified
Azure AD experts. However, limited scalability due to the high
cost of talent acquisition has restricted its growth.

• CloudMakers (CM): Founded in 2017, this Florida-based

company provides rapid deployment solutions for smaller
businesses. While its customer base is wide, its reputation for
security practices needs improvement, impacting customer
retention. However, CM has proprietary automation tools that
speed up Azure AD deployment, giving it a cost-effective
advantage.

The Companies’ summary financials are provided in the Exhibit I.

Exhibit II provides additional financial metrics for the target
companies. In addition, the financial statements, Alex was
provided some additional information for recasting financial
statements to help Alex to come up with adjusted EBITDAs for
both the companies:

1. Revenue Adjustments
Contract Renewals: Both companies have multi-year Azure
AD service contracts; adjustments include $500,000 for TS

Merger & Consolidation Case: Azure AD 3

 and $350,000 for CM to annualize revenues from newly
signed contracts.

2. Expense Adjustments
Payroll and Certification Costs: Both firms’ books list
payroll on a cash basis, requiring adjustments to full
accrual accounting. Add $400,000 to TS and $250,000 to
CM.

Core Earnings Adjustments:

▪ TS: Remove $100,000 for one-time consulting fees
and $150,000 for excessive owner perks.

▪ CM: Remove $120,000 for non-recurring legal fees

and $180,000 for owner compensation above industry
average.

3. Depreciation Adjustments
Adjustments for consistent reporting, adding back
$300,000 in TS and $250,000 in CM.

Opportunity Evaluation Strategy

1. Recast Financials for EBITDA Calculations:

Alex will need to adjust for various costs, such as the
expense of Azure AD certifications for technical staff,
consulting hours, and sales and marketing. He’ll adjust
revenue to account for annual and multi-year subscription
renewals, which are typical in Azure AD contracts.

Alex was provided some additional information for

recasting financial statements to help Alex to come up with
adjusted EBITDAs for both the companies:

i. Revenue Adjustments
Contract Renewals: Both companies have multi-year
Azure AD service contracts; adjustments include
$500,000 for TS and $350,000 for CM to annualize
revenues from newly signed contracts.

ii. Expense Adjustments

Payroll and Certification Costs: Both firms’ books list
payroll on a cash basis, requiring adjustments to full
accrual accounting. Add $400,000 to TS and
$250,000 to CM.
Merger & Consolidation Case: Azure AD 4
 Core Earnings Adjustments:
▪ TS: Remove $100,000 for one-time consulting
fees and $150,000 for excessive owner perks.

▪ CM: Remove $120,000 for non-recurring legal

fees and $180,000 for owner compensation
above industry average.
iii. Depreciation Adjustments
Adjustments for consistent reporting, adding back
$300,000 in TS and $250,000 in CM.

2. Consolidation and Service Scalability Analysis:

To achieve the results, BlueSky needs to be able to
consolidate both firms and then need to scale them rapidly
to attract a higher valuation. Alex plans to leverage TS’s
expertise in enterprise-grade services and CM's proprietary
tools to create a unified, scalable solution. Following are
opportunities that Alex sees in consolidating the businesses:

• Complementary Service Models:

TS’s focus on enterprise clients and CM’s strength in
automation tools for small to mid-sized businesses
provide a balanced service portfolio. Integrating these
models can widen the client base while supporting
scalable services across diverse customer segments.

• Cross-utilization of Proprietary Tools:

CM’s automation tools can be leveraged by TS to reduce
deployment times and improve service efficiency for
larger clients. This synergy can lower service delivery
costs and enhance client satisfaction by providing faster
and more streamlined Azure AD implementations.

• Centralized Back-Office Functions:

Centralizing back-office operations, such as HR, finance,
and customer support, can quickly generate cost savings
and improve operational efficiency. By standardizing
these processes, BlueSky can reduce redundancies and
lower overall operational costs.

• Unified Sales and Marketing Strategy:

A consolidated sales and marketing team can leverage
TS’s enterprise reputation and CM’s cost-effective
approach to cover the full client spectrum. Aligning

Merger & Consolidation Case: Azure AD 5

 messaging and combining resources across both
customer bases will likely yield marketing efficiencies
and expand market reach.

While he sees a lot of opportunities in the consolidation of

the businesses, he is also cognizant about issues that he
could face during the consolidation. Following are some of
the issues he is worried about:

• Cultural and Operational Integration:

TS and CM have different operational philosophies: TS
emphasizes high-quality, personalized service for
enterprise clients, while CM focuses on efficiency and
automation for smaller businesses. Aligning these
approaches without losing the unique value
propositions of each firm can be challenging and may
impact employee morale.

• Differing Technology Infrastructures:

Integrating CM’s proprietary automation tools with TS’s
enterprise-level service delivery may require significant
IT investment. Differences in internal systems or
software architecture could lead to compatibility issues,
impacting service consistency and increasing transition
costs.

• Talent Retention and Skill Alignment

Skilled personnel are crucial to cloud services, and both
companies have developed specialized skills in different
customer segments. Balancing retention strategies and
aligning employee incentives may prove complex, as
CM’s workforce might be more accustomed to high-
volume client processing, while TS’s employees may
expect a more hands-on, client-focused approach.

• Client Transition and Brand Management

Each firm has established its own reputation and client
expectations. Transitioning to a unified brand without
confusing or alienating existing clients requires careful
change management. Furthermore, blending TS’s
enterprise model with CM’s SMB focus could dilute the
brand positioning if not managed strategically.

Merger & Consolidation Case: Azure AD 6

 • Pricing and Service Standardization
Aligning pricing models and service standards can be
difficult due to the different client types. Standardizing
pricing may necessitate a careful approach to avoid
alienating either segment. Additionally, finding a
balance between high-touch service for larger clients
and efficient, lower-cost service for smaller clients is
essential but challenging.

3. Forecasting Growth and Integration Plans:

BlueSky’s strategy focuses on creating a best-in-class
service model by:

• Integrating TS’s customer support framework with CM’s

automation tools.
• Standardizing security practices to improve CM’s
customer retention.
• Consolidating sales, HR, and IT services to reduce
operating costs.
• Setting aggressive expansion targets for both service
subscriptions and large enterprise clients.

Using the industry benchmarks as a guideline, Alex intends

to project financials of the consolidated firm and estimate
its valuation under different exit scenarios. Following are
some of the industry benchmarks that Alex has sourced
from his research:

• Revenue Growth: Targeting 20% annual growth driven

by service expansion and integration synergies.

• EBITDA Margin Improvement: Leveraging cost

efficiencies from consolidating back-office functions
(sales, HR, IT) and standardized service delivery
processes.
• EBITDA Multiple: Targeted exit range of 6-8x, consistent
with industry averages and achievable through scale and
profitability gains.

Exhibit IV provides some additional metrics to help Alex

forecast financials for the consolidated company.

4. Valuation, Benchmarking and calculation of returns:

Merger & Consolidation Case: Azure AD 7

 Alex has been informed about expectations on valuations
from the shareholders of TS and CM. TS shareholders are
expecting USD 50 million while CM’s shareholders feel they
should be able get more than USD 25 million for their
company.

BlueSky typically applies a 4-6x EBITDA multiple to similar

service firms. TS’s strong reputation could allow for a higher
multiple, while CM’s automation tools, if integrated
successfully, could position the consolidated firm at the
higher end of the valuation spectrum.

Moreover, Alex would need to review the financial metrics

of similar public companies specializing in cloud identity
management, security, and Azure AD integration. These
benchmarks will provide a reference point for the
consolidated company and allow for realistic valuation and
profitability comparisons. Exhibit V provides a summary of
industry average metrics.

5. Exit Strategy:
After three to five years, BlueSky plans to either sell the
consolidated firm to a larger IT consultancy or pursue an
IPO, applying appropriate EBITDA multiple if growth targets
are achieved.

Final Thoughts:

This acquisition is Alex's first major project as a partner. He needs

to ensure both companies’ Azure AD expertise aligns with
BlueSky's broader tech acquisition strategy. With the final
investment committee meeting approaching, Alex prepares to
recommend acquisition prices, an integration strategy and
timeline, and a forecast of potential revenue and EBITDA growth.
Alex will need to be able to address IC’s concerns, if any and be
able to convince the IC about the potential of the deal, including
potential returns for BlueSky.

Merger & Consolidation Case: Azure AD 8

EXHIBITS

Exhibit I
Tech Solutions (TS) and CloudMakers (CM) Financial Summaries:

Income Statement Tech Solutions CloudMakers

(TS) (CM)
Revenue $22,000,000 $16,500,000
Cost of Services $8,000,000 $7,200,000
Gross Profit $14,000,000 $9,300,000
Operating Expenses $5,200,000 $5,000,000
Operating Income $8,800,000 $4,300,000
Balance Sheet Tech Solutions CloudMakers
(TS) (CM)
Assets
Cash $2,000,000 $1,000,000
Accounts Receivable, Net $3,200,000 $2,500,000
Prepaid Expenses $200,000 $150,000
Total Current Assets $5,400,000 $3,650,000
Fixed Assets, Net $1,800,000 $1,400,000
Total Assets $7,200,000 $5,050,000

Liabilities and Equity

Accounts Payable $800,000 $600,000
Accrued Expenses $900,000 $700,000
Total Liabilities $1,700,000 $1,300,000
Owners’ Equity $5,500,000 $3,750,000
Total Liabilities & Equity $7,200,000 $5,050,000

Exhibit II
Financial Metrics Analysis of the Target Companies

Metric Tech Solutions (TS) CloudMakers (CM)

Revenue Growth Rate 20% 15%
Gross Profit Margin 64% 56%
Operating Margin 25% 21%
EBITDA Margin 30% 25%
Net Income Margin 15% 12%
Debt-to-Equity Ratio 0.45 0.50
Revenue per Employee $250,000 $280,000

Merger & Consolidation Case: Azure AD 9

Exhibit III
Recasted Financial Summaries for the Target Companies:

Tech Solutions Cloud Makers

Recasted EBITDA Summary
(TS) (CM)
Net Revenue $22,500,000 $16,850,000
Cost of Services (adjusted) $8,400,000 $7,450,000
Gross Profit $14,100,000 $9,400,000
Operating Expenses
$4,750,000 $4,450,000
(adjusted)
Depreciation $300,000 $250,000
Adjusted EBITDA $9,050,000 $5,200,000

Exhibit IV
Forecasting Assumptions:

Tech Solutions CloudMakers

Assumptions
(TS) (CM)
Revenue Growth 20% 15%
New Clients (Annual) 25 40
Operating Expenses
5% 5%
Increase
Cost of Services
6% 6%
Increase
Investment Holding
4 years 4 years
Period
Debt: 50% of acquisition @ 8%
M&A Financing
p.a

Merger & Consolidation Case: Azure AD 10

Exhibit V
Industry Average Metrics for Cloud Identity Management and
Security Services

Industry
Metric Explanation
Average
Revenue Growth Reflects steady demand due to digital
15-18%
Rate transformation and security needs.
Gross Profit High due to scalable software and
65-70%
Margin consulting services with limited COGS.
Typical for established firms with
Operating Margin 25-30% balanced service and administrative
expenses.
Achieved through operational efficiency
EBITDA Margin 30-35%
and high-margin consulting contracts.
Consistent with profitable cloud
Net Income
15-20% consulting firms focused on service
Margin
contracts.
Debt-to-Equity Moderate leverage, with a preference for
0.3-0.5
Ratio equity financing in the sector.
Revenue per $275,000 - Common range, indicative of automation
Employee $325,000 and productivity in cloud services.
Customer
$5,500 - Average for customer acquisition in
Acquisition Cost
$7,000 competitive markets like cloud security.
(CAC)
Client Retention Reflects client loyalty due to critical
80-85%
Rate nature of identity management services.
Multi-year contracts are common for
Average Contract
2-3 years stable revenue and relationship
Length
continuity.
Employee Slightly higher due to high demand for
12-15%
Turnover Rate cloud skills; retention strategies help.
Cost per Service Average for cloud identity specialists,
$100 - $120
Hour reflecting skilled labor and overhead.
EBITDA Multiple Valuation multiple used for similar
6-8x
(Acquisition) acquisitions.

Merger & Consolidation Case: Azure AD 11