Data centre consolidation: Fewer, bigger, better

24 July 2019 | Guy Matthews

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As the data centre sector continues to consolidate, Guy Matthews takes a look at some of the major deals that have changed the shape of the market, and considers the drivers that will define the sector’s future.

The last few years have seen a surging tide of takeovers among data centre operators as they seek scale and try to broaden the markets they address. The number of merger and acquisition deals in the data centre sector maintained its upward curve in 2018, according to data from independent analyst firm Synergy Research Group. It recorded the completion of 68 major deals during the period, with a total value of $16bn.

Synergy identified a clear trend towards enterprises not wanting to own or operate their own data centres, and instead focus on providing services to employees through outsourcing to specialists.

Over the past five years, the largest investors have been Equinix and Digital Realty, the world’s two leading colocation providers (scroll to the bottom of this article to see the most significant M&A deals across the data centre sector in the past two years). In aggregate they spent almost $23 billion on acquisitions of other data centre operators over that period. Other notable data centre operators who have been major acquirers include CyrusOne, Iron Mountain, Digital Bridge/ DataBank, NTT and Carter Validus.

So what is driving all this activity? “Our acquisition strategy has been powered by three factors,” explains Andy Power, chief financial officer of Digital Realty. “For one, we felt that we had to become more global for our customer base. Our customers, from the hyperscalers to the smaller service providers, are all doing business in multiple regions. In that vein, we just acquired Ascenty in Brazil. Secondly, we’ve been looking to build the widest possible product set to appeal to the maximum number of customers. The third factor is all about scale. Everything in this business is about size.

We used to deliver 1MW data halls, then that went to 3MW, then 6MW. Our latest flagship on our Ashburn campus, outside Washington DC, is 100MW. Operating at scale is crucial to compete in this business, and consolidation is helping to achieve that. That was behind our purchase of DuPont Fabros in the US.”

Russell Poole is MD UK and the Nordics at global interconnection and data centre company Equinix, and he attributes the acquisition boom in part to the dramatic changes and technological developments that are affecting the whole ICT sector.

“The data centre market has been growing significantly due to the massive increase in data traffic and the advent of cloud computing,” he observes. “This has led to a remarkable increase in data centres. Cloud has become a necessity for enterprises and with this need to turn to the cloud, data centre infrastructure has been increasing rapidly.”

Poole thinks that the most exciting changes for the sector are still to come: “The launch of 5G, in particular, will have one of the biggest impacts as it will mean increased use of technology on the move,” he predicts. “It will open endless possibilities with massive investments needed to ramp-up new edge infrastructure and to prepare for the high radio density required for 5G. It also opens the door for new applications that demand absolute reliability, such as in healthcare, energy or autonomous transportation. 5G is not just about faster data connections and consumer internet services, it is the key to endless possibilities for digital transformation especially in a growing IoT and AI- connected world.”

New regions

Europe is no exception to the acquisition boom, with Interxion, for example, acquiring the data centre business of Vancis Holding, an independent Dutch provider of colocation, cloud and managed services based in Amsterdam’s Science Park. But, says Andrew Fray, managing director of Interxion UK, buyouts are not the company’s preferred means of growth.

“We are building right cross our Western Europe footprint,” he explains. “We see huge opportunities for organic growth, and in fact we can’t build fast enough at the moment to meet demand.”

Fray sees various dynamics affecting the market, not least the rise and rise of the hyperscale cloud sector: “Across Europe we’re following the trend towards what I’d call mega sites to meet hyperscale needs,” he adds. “We don’t have a global footprint, it’s true, but hyperscalers are on the lookout for players who know their local market, and how to acquire things like power and connectivity in that local market. Their expectation is quality that matches a global standard, which we offer.”

He says the company is building to meet the needs of digital transformation in its widest sense. “We’re seeing the movement of resources into the cloud,” he points out. “Workloads are generally going to a variety of clouds. We’re also seeing the rise of the ‘connected community’, which is a big thing for us in London where we have a collection of financial services players, mostly capital markets trading companies as well as a halo effect of related fintech companies. Banks are looking for ways to orchestrate the different apps they are running in areas from blockchain to DDoS mitigation to invoicing. They want to connect not only their resources, but to connect those to other participants in their world. We’re providing a similar function in communities such as media.”

Data capabilities

Digital transformation is without doubt one of the data centre market’s biggest boosters, agrees Archana Kesavan, senior product marketing manager with network monitoring player ThousandEyes: “There can no longer be any doubt that digital transformation is one of the most crucial concerns of modern businesses,” she claims. “It is estimated that initiatives within this space will reach an investment of $2.2 trillion globally this year. Meanwhile, the majority of business leaders also realise the importance of such a drastic change, with 66% wanting to transform their businesses.”

The widespread adoption of automation, artificial intelligence and machine learning is also having a significant knock-on effect on services.

“Traditionally, data centre providers primarily worked toward a centralised cloud model where the many processes such as storage, computing and analytics took place in a centralised data centre that is different from the actual location of data generation,” observes Falk Weinreich, SVP sales and marketing, Colt DCS. “As businesses increasingly adopt a machine-led industrial journey, this model has swiftly become outdated.”

Handling new volumes

The consequence is an increased demand for low-latency data services, he says, with the data centre industry increasingly embracing edge computing: “Moving data and applications to the edges of a network, narrows the distance between users and data, resulting in improved speed, reliability and efficiency,” he concludes.

“This allows data centres to generate, process and analyse large volumes of data in a fast, stable and consistent manner, while businesses are able to maintain operational runtime effectively.”

Networking solutions vendor Apstra, which is trying to disrupt the WAN market as a pioneer in intent-based networking, is now moving in on the data centre sector with a similar plan.

“Data centres seem to go through a transformation every few years, and the transformation that we’re currently seeing is what for want of a better term I’ll call intent-based data centres,” explains Michael Wood, Apstra’s chief marketing officer. “This is reflected in higher distribution. There are more data centres where enterprises do compute, storage and applications. We’re also seeing a trend towards self-remediation where data centres are expected to repair themselves.

As an enterprise you also want your data centre to have some of the attributes of what the hyperscale players are doing, relative to cloudification. You want to turn up services as you can AWS or Azure. You want control regardless of where the application or user resides. Automation is key too.”

Small wonder that Synergy Research Group expects further seismic change to hit the data centres market, and for the acquisition trend to continue for at least the next five years as data centre operators look to scale up to meet the market’s fast changing needs.

 

The most significant M&A deals across the data centre sector in the past two years

In May 2017, Equinix announced the finalisation of its $3.6 billion acquisition of a number of data centres owned by carrier Verizon. The 29 facilities that were part of the deal were spread over 15 metro areas in North America and South America. The deal was at the time the largest example of the trend for carriers to offload data centre assets in a bid to reduce operational costs and raise capital while refocussing around core activities. It followed CenturyLink, Tata Communications, AT&T and Windstream in this respect.

September 2017 saw the completion of the merger of data centre giant Digital Realty and rival DuPont Fabros Technology. The $7.8 billion all-stock deal created an entity with a portfolio of 157 data facilities. In July 2018, data centre operator Global Switch sold a 25% stake in its business to a consortium of Asian investors for $2.8 billion. This was the largest deal of its kind last year. In December, Digital Realty completed the acquisition of Ascenty, the Brazilian data centre provider, from private equity firm Great Hill Partners in a transaction valued at approximately $1.8 billion.

Edge services provider EdgeConneX expanded its stake in the European data centre market in January 2019 by purchasing Vodafone’s facility in Munich. The purchase followed the acquisition of a facility in Warsaw in Poland. The same month saw Boston-based investment firm Berkshire Partners move for a majority stake in Teraco Data Environments, subject to approval. Teraco, based in Johannesburg, is Africa’s largest data centre operator, with more than 30MW of power load over five locations. Meanwhile, also in early 2019, private investment firm GI Partners continued a spate of technology infrastructure investments with the purchase of two data centres from NTT Data, in Plano, Texas and Quincy, Washington. Stack Infrastructure was launched a a new name on the market by IPI Data Center Partners and Infomart Data Centers, resulting from the merger of IPI’s T5 data centers, along with the remaining properties of Infomart, following the sale of its Dallas carrier hotel to Equinix.

In March 2019, AT&T finalised the sale of 31 of its colocation data centre facilities to Brookfield Infrastructure. The deal saw AT&T receive US$1.1 billion from Brookfield which has now organised the assets under the Evoque Data Center Solutions brand. AT&T will offer its business customers Evoque’s colocation services. April 2019 was the month when Equinix closed the purchase of Switch Datacenter’s AMS1 data centre business in Amsterdam for $34 million. The facility will be renamed Equinix AM11 International Business Exchange (IBX) data centre and is located close to Equinix’s existing campus in southeast Amsterdam.

In May, Dutch telco KPN agreed to sell its data centre subsidiary NLDC to a fund managed by DWS, a global infrastructure investment manager, for an undisclosed amount. In the same month, Node4, the UK-based hybrid cloud, data centre and communications managed services provider, acquired virtual private cloud provider Secura. And hyperconverged storage specialist Cohesity acquired data management player Imanis Data.

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