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Data center market trends: Acquisitions support cloud, managed IT

Recent M&A activity in the data center market shows businesses shedding their data center operations, buyers expanding geographic coverage and more.

The pace of data center acquisitions has been brisk of late, as investors seek to expand their geographic footprint and meet the growing demand for outsourced IT services.

Recent deals reflect several data center market trends, which include the entry of new buyers, a bid to strengthen nationwide coverage, and the consolidation of second-tier data center markets. Some acquiring companies suggest additional buys are in the works. Consider the following examples:

  • Gawk Inc. in November inked a definitive agreement to acquire WebRunners Inc.'s Irvine, Calif., data center, a move that could prove the first in a series of data center purchases by the Los Angeles-based global digital distribution company.
  • TierPoint LLC in October announced an agreement to purchase Xand, a colocation, cloud, disaster recovery and managed IT services company that operates six data centers.
  • Also in October, Fortune Data Centers and Dallas Infomart combined assets under a single operating company, which, in turn, acquired a former AOL data center in Ashburn, Va.
  • North of the border, TeraGo Inc., a data center and cloud services provider in Canada, acquired a suburban Toronto data center that BlackBerry previously managed.

Industry executives suggested that business and financial trends are converging to make data centers an attractive investment. The demand for cloud and managed IT services continues to expand, and the relatively low cost of capital makes transactions a bit easier for buyers.

Paul Estes, CEO of TierPoint, cited midmarket consolidation opportunities and low interest rates as factors behind the acquisitions. He also noted investors who have been in the data center market for a while and now want to see liquidity. TierPoint, a cloud, colocation and managed services provider based in St. Louis, launched in 2010 with a data center acquisition in Dallas.

"Overall, the data center industry has been getting more attention," Estes said. "It is a favorable industry from an investment standpoint."

Expanding coverage

Expanded geographic reach is an important motivator behind some of the recent data center deals. A desire to become a national data center operator drove the merger of Fortune Data Centers and Dallas Infomart, for example. Fortune Data Centers contributes facilities in Hillsboro, Ore. and San Jose, Calif., while Infomart adds its Dallas data center.

The combined company, dubbed Infomart Data Centers, has closed on the purchase of a data center in Ashburn in Northern Virginia to further expand its footprint. John Sheputis, president of Infomart Data Centers, said IT clients and brokerages representing IT clients are looking to gain a data center presence in a handful of key markets across the country. The company's merger and acquisition initiative supports the "need to be national," he explained.

"I look at this as a nod to the changing nature of demand and that national tenants and national brokerages are looking for consistent services across certain markets," Sheputis said.

Chicago, Dallas, Los Angeles, New York, the San Francisco Bay Area and Washington, D.C.'s Northern Virginia suburbs are considered top-tier data center markets, given the large concentrations of data center inventory and network connectivity in those regions. Accordingly, data center companies going national seek out facilities in at least some of those metropolitan areas.

Other data center operators, however, specifically target Tier 2 markets for expansion.

365 Data Centers, a colocation and cloud services provider based in Emeryville, Calif., considers Tier 2 cities as its mainstay markets. John Scanlon, CEO of 365 Data Centers, said the company has a few data centers in the top 10 metropolitan statistical areas (MSAs), but noted that the company's sweet spot is among MSAs ranked 11 through 50. The company has data centers in Buffalo, N.Y.; Nashville, Tenn.; Pittsburgh and Tampa, Fla., for example.

Scanlon said the smaller cities offer the advantage of less competition. In addition, mid-tier cities are experiencing a renaissance of urban revitalization and residential property development. Urban centers have attracted Millennials who want to live closer to work and Boomers lured back to the city for access to the arts. That demographic trend creates demand for broadband technology, streaming media and cloud-based services, Scanlon said.

Most 365 Data Centers facilities are in midtown locations, where local distribution networks converge. Media owners house their content in the company's data centers, where it can be distributed via cable, fiber-to-home, satellite or wireless networks, Scanlon said.

A data center located at such a point of convergence can enjoy a unique position in the local ecosystem, he noted.

"We'd like to own more of them," Scanlon said.

To that end, 365 Data Centers has lined up the financial resources to pursue acquisitions as well as organic growth. The company in September said it raised $16 million in Series B funding from investors Crosslink Capital and Housatonic Partners, while securing a $55 million credit facility from Fortress Credit Corp.

The funding, Scanlon said, provides the seed money to pursue expansion, while the Fortress relationship offers another source of capital "we can tap into as we find the right targets."

TierPoint, meanwhile, also cultivates the middle market. The company purchased a 50,000-square foot data center in Dallas to launch its operations, but has since shifted its attention to Tier 2 markets. The Xand transaction, which the company expects to finalize later this month, will further that focus, providing data centers in Greater Hartford, Conn.; Metrowest Boston; Pennsylvania's Lehigh Valley region; Valley Forge, Pa. and Westchester County, N.Y.

TierPoint recapitalized in June with a new group of investors. This backing has given the company the ability to continue its strategy of consolidating Tier 2 markets, Estes said.

"We will continue to look forward to opportunistic acquisitions to add to our platform," he added.

TierPoint is in the process of integrating its data center acquisitions onto one platform, which will provide a standard set of billing, accounting, data center infrastructure management and ticketing systems.

What we are seeing is a rationalization and consolidation of how IT is being housed -- it's coming out of office buildings and being put into special facilities.
John Sheputispresident of Infomart Data Centers

Another recent data center acquisition marks the entry of a new buyer. Gawk described its agreement to acquire WebRunners' Irvine data center as its first step in a plan to acquire several data centers. The company aims to use its data centers to store the data produced by cell phones. Gawk's business plan calls for the company to enter contracts with major telcos to offload that data.

Gawk decided to acquire data centers versus lease space in data center facilities.

"As we were building out our platform, one of the things that became very apparent was that ... we needed to create our own infrastructure," said Scott Kettle, CEO of Gawk. "This isn't the last one we are looking to do," he said of the Irvine data center acquisition.

Driving demand for services

Industry executives said the increasing demand for data center services justifies the current push to acquire. A major share of that demand stems from businesses looking to shed their data center operations.

"Most of the demand is coming from those leaving corporate data centers," Sheputis said. "What we are seeing is a rationalization and consolidation of how IT is being housed -- it's coming out of office buildings and being put into special facilities."

Even organizations in industries with deep roots in technology and infrastructure -- financial services and telecommunications, for instance -- may not want to own all their own data centers, Sheputis said. He suggested that forward-thinking companies are focusing on applications as the source of innovation, while tapping a specialist to take responsibility for chilling plants, uninterruptible power supplies, physical security and other aspects of data center ownership.

Estes agreed that enterprises are looking to migrate data centers out of corporate office environments, which he said are unsuitable for data center operations.

"They don't have the redundancy that a true data center has," he said. "Customers are looking to really harden their operations by outsourcing to a more secure, more reliable facility."

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What are the most important characteristics in your choice of a data center provider?
When you are looking at choosing a data center provider, there are a few things you should keep an eye on.
First, choose one that is close to you. An amazing data center looks a lot less amazing if you have to hop on a plane every time you want to touch base with the people there.

Look for reliability. What is their up time like? Are they there whenever you need to talk to them?

Finally, look at the speed with which you can roll out. If you can't implement for a year, give it a pass; it's not worth it!