Conglomerate Valuations Always are Tougher than Pure Plays

Fluid ecosystems, where some participants supply multiple types of value, are hard to evaluate, from a financial perspective, especially when some categories of activity have one set of valuation multiples while others have differing multiples. 

That is the reason many observers prefer “pure play” assets rather than conglomerate business models where assets of distinct types are co-mingled. Consider the way some products are sold by multiple entities with different valuation multiples. 

In such cases one often has to develop “sum of the parts” estimates that attempt to account for the different revenue, profit margin and valuation metrics different types of products feature. 

Software-defined interconnection, for example, suggests the changing roles of connectivity and data center providers. In recent years, SDI has been a capability featured by firms such as Equinix for connecting servers that are not colocated within a single data center. 

The idea is to enable network-to-network connections without the need to deploy network appliances at each site, as is required by SD-WAN or MPLS solutions also pitched as “software defined” networking approaches.

But many would argue that software-defined interconnection is about connecting locations, data centers, clouds or apps; colocation facilities; internet exchanges or service providers in a more granular and on-demand way than is possible with SD-WAN. 

Ideally, think about the matter as eliminating the difference between north-south traffic within any single data center and east-west traffic across the globe. 

That essentially means that some managed service providers; some connectivity networks; some data centers and some infrastructure providers also are in the SDI business, even if the specific revenue contributions might be hard to untangle. 

In the meantime, SDI might be considered an emerging business category with contestants in formerly-distinct realms, the most significant perhaps being a function both data centers and connectivity providers supply. 

And leaves analysts with the difficult job of assessing the relative contributions of different product categories--possibly with distinct profit margin and valuation metrics--as drivers of overall valuation.