Is Trade M&A starting to get more interesting?
Investor interest in the data centre sector has soared in recent years – not just in money terms but types of investors.
From investor interest mainly coming from traditional investment banks, private equity and property funds, we are seeing interest from a wide variety of groups.
This includes sovereign wealth funds, pension funds and broader TMT and infrastructure funds. We are also starting to see more interest from environmental and power infrastructure investors.
However, trade M&A has tended to be rather more predictable. It has been typically co-location providers buying similar businesses. It has been about scale and market entry. With, sometimes, a bit of ‘taking out a competitor’ or ‘stopping a larger rival merging’.
But this sense of ‘usual suspects’ is starting to widen out.
This is happening in two ways’; who the co-location players are buying, and who is buying co-location players?
On the first case, a great example is Equinix acquiring Packet.
Equinix to acquire Bare Metal Leader Packet
Acquisition to accelerate Equinix strategy to help enterprises seamlessly deploy hybrid multicould infrastructures.
The logic is clear. We speak to a lot of enterprises who have seen their internal IT departments shrink horribly, and have very limited cloud skills. They often find the co-location providers a frustrating supplier – they might understand their data centre very well, but expect the enterprise to have much of the expertise and skills. The enterprise also does not want to deal with multiple suppliers. They want providers who can truly help them with their ‘cloud journey’ rather than supply one small piece of the puzzle.
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From an Equinix perspective, it is not without its challenge. Its 2015 acquisition of Nimbo, a professional services firm, highlighted the issue. The expectation is that a co-location provider is neutral (and not just regarding carriers) and is not pushing a particular solution. The retail co-location providers also have a large number of customers who may suddenly see themselves as potential competitors in some deployments.
But the longer-term threat to Equinix is that, if they do make such acquisitions, then they allow others to own the customer and risk being the commoditized infrastructure element.
Therefore we expect similar such acquisitions as co-location providers seek to expand their enterprise offerings and differentiate from competitors. Who will be next? A number of possibilities, but one interesting angle could be one of the new connectivity providers, such as Megaport.
On the second case, will we start seeing other trade buyers acquiring data centre assets? The first signs have been the tower companies dipping their toes into the opportunity which can be roughly defined as ‘edge’.
In a 5G/IoT world, do data centre assets suddenly become a lot more attractive? Yet, we have seen many telcos divesting (or planning to divest) data centres, as they seek to raise funds, from Verizon to KPN to Telefonica and Telecom Italia. But developing an ‘edge play’ could lead to further interesting acquisitions and changing business models.
First Foray into Data Centres
Another view has been that as mature data centres are seen as safe, diversified and high-yielding plays, then larger infrastructure owners may come in.
However, perhaps the most interesting angle is to follow the Equinix/Packet line of thinking. If Equinix can indeed become the ‘home of the hybrid cloud’ and, as so many surveys predict, hybrid cloud is the future of cloud deployments, then will the co-location providers become attractive to any trade buyer keen to be a leader in cloud infrastructure?
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- The Digital Digest, Ep 5 – 29 May 2020