Category: datacenters

Hosting M&A dips in 2018 as big players slow activity

Mark Fontecchio

Following two years of outsized spending, hosted services providers took a breather in 2018. M&A activity in the sector decreased across the board, as deal volume, aggregate spending and valuations all dropped, driven by a pullback among the largest hosting and multi-tenant datacenter (MTDC) providers. We expect the biggest buyers to return to heavier spending in 2019, fueled by the increasing need for infrastructure to support workloads in the cloud.

Despite a 23% drop in volume and 40% reduction in spending, hosted services M&A clocked its fourth consecutive year of more than $10bn in total value with $10.7bn. In the decade leading up to 2015, expenditures surpassed that benchmark just twice. And yet, the steep drop last year was jarring. According to 451 Research’s M&A KnowledgeBase, valuations also dropped – the median multiple on enterprise value to trailing revenue fell last year to 2.7x from 3.6x in 2017.

While overall tech M&A saw larger enterprises buying again, hosted services witnessed the opposite, with Digital Realty Trust and Equinix stepping back. From 2015 to 2017, those two buyers combined for about five acquisitions and $6bn in spending each year. In 2018, they inked two deals among them for less than half that typical amount. Digital Realty cited its muted share price as a reason for stepping back – both it and Equinix started 2018 with a dip, followed by a summer recovery and then ending the year down alongside the general markets.

Still, even with the decreased spending, Digital Realty Trust and Equinix inked two of the year’s most notable hosting deals. Digital’s $1.8bn purchase of Ascenty gives it a strong foothold in Latin America, while Equinix’s $800m pickup of Infomart Dallas highlights the company’s continued efforts to extend its interconnection reach. Setting aside those two buyers, both financial and strategic acquirers each reduced spending more than 20%.

Exacerbating the decline, hosted services companies are less likely to buy their peers, and have increasingly looked to other markets for growth, particularly managed services, while they aim to move up the stack as their customers increasingly opt for cloud over datacenter deployments. In 2018, hosted services companies purchased 19 IT services and outsourcing business, compared to 13 in 2017. In that vein, we saw deals such as Rackspace buying Salesforce cloud integrator RelationEdge, and eHosting acquiring Microsoft cloud MSP LiveRoute.

Hosted services M&A sees another $15bn+ year

Mark Fontecchio

Contact: Mark Fontecchio

Hosted services M&A in 2017 had a second consecutive year of $15bn+ in spending, an unprecedented streak in the sector. While overall tech M&A spending dropped steeply, it was essentially flat in hosted services. Meanwhile, the median deal value rose as smaller and medium-sized players decided on sale or scale to survive, and as targets grew scarce, acquirers paid higher multiples.

An indicative transaction of these sector trends was also the largest of 2017 – Digital Realty Trust’s $6bn purchase of DuPont Fabros. The past three years have been rich with big-ticket deals in hosted services, but this acquisition stands out because of its outsized multiples – 14x trailing revenue and 23x EBITDA. Those are the highest-ever multiples in $1bn-plus hosted services transactions in 451 Research’s M&A KnowledgeBase, which dates back to 2002.

Digital Realty’s reach for DuPont Fabros was not an isolated incident, either. Three of the four highest value-to-revenue multiples in $100m+ hosted services deals happened in 2017, according to the M&A KnowledgeBase. Overall, the sector’s median EBITDA multiple of 16.1x was the highest since 2012. Three consecutive years of more than $10bn in deal value has consolidated more than 10 million square feet of operational space, according to 451 Research’s Datacenter KnowledgeBase. That has removed many big players from the market, making larger targets scarcer, and thus more valuable in 2017.

In 2018, we expect hosted services M&A to continue to be robust to account for enterprises increasingly pushing workloads to the cloud. According to a 451 Voice of the Enterprise survey last year, the percentage of IT workload spending in the cloud is expected to jump from 27% in 2016 to 46% in 2018. Managed hosting and colocation providers must scale vertically – offering more services – and geographically to suit enterprise needs for functionality and availability, respectively. Large public hosted service providers that are still on the market could fetch a premium, while thousands of smaller players could sell or merge with one another to become competitive.

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Rackspace pivots to private

Brenon Daly

Bruised by a fight in the clouds, Rackspace has opted to go private in $4.3bn leveraged buyout (LBO) with Apollo Global Management. The company, which has been public for eight years, is in the midst of a transition from its original plan to sell basic cloud infrastructure, where it couldn’t compete with Amazon Web Services, to taking a more services-led approach. Terms of the take-private reflect the fact that although Rackspace has made great strides in overhauling its business, much work remains.

Leon Black’s buyout shop will pay $32 for each share of Rackspace, which is exactly the price the stock was trading at a year ago. Further, it is less than half the level that shares changed hands at back in early 2013. Of course, at that time, Rackspace was growing at a high-teens clip, which is twice the 8% pace the company has grown so far this year.

In terms of valuation, Rackspace is going private at just half the prevailing market multiple for large LBOs so far in 2016. According to 451 Research’s M&A KnowledgeBase, the previous nine take-privates on US exchanges valued at more than $500m have gone off at 4.4x sales. (See our full report on the record number – as well as valuations – of take-privates in 2016.) In comparison, Rackspace is valued at just slightly more than 2x trailing sales: $4.3bn on $2bn of revenue, with roughly the same amount of cash as debt.

More relevant to Rackspace as it moves into a private equity (PE) portfolio is that even as the company (perhaps belatedly) transitions to a new model – one that includes offering services on top of AWS, Azure and other cloud infrastructure providers that Rackspace once competed against – is that it generates a ton of cash. Sure, growth may be slowing, but Rackspace has still thrown off some $674m of EBITDA over the past year.

The company’s 33% EBITDA margin is even more remarkable when we consider that Rackspace, which has more than 6,000 employees, is relatively well-regarded by its customers for its ‘fanatical’ support of its offerings. While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.

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A dimming Active Power looks to sell

Mark Fontecchio

Contact: Mark Fontecchio

Active Power, which produces flywheel-based uninterruptible power systems (UPS) for datacenters, is seeking a buyer. In conjunction with a dismal Q2 earnings release, Active Power announced that its board is reviewing “strategic and financial alternatives” that could include new investors, pivoting to a different business or selling the company. However, based on its own financial performance as well as previous transactions in this niche market, any deal would be a tough sell for Active Power. It currently sports a market cap of just $9.5m, having lost about two-thirds of its value so far this year.

The stock’s slump has mirrored the company’s declining financial performance. In the first half of 2016, Active Power’s revenue has plummeted 45% year over year to just $16.4m. More alarmingly, losses more than tripled to $5.7m, leaving it with only about half as much cash as it had two years ago. While large orders for backup power systems can significantly affect short-term results, the company’s financial performance over the past year shows uninterrupted red ink and a dipping top line.

Active Power says deferred deliveries and delayed orders were cause for the decline. This is just the latest indication that flywheel-based UPS are not yet widely accepted. Despite their smaller footprint and longer lifetime, there is a combination of resistance ‎to change in the datacenter industry, a fear of shorter ride-through times compared with batteries, lower availability in the channel, and the fact that financial prudence is still rather new to datacenter operations. Further, the smaller flywheel-based UPS vendors have been at a competitive disadvantage as they have gone against giant battery UPS sellers such as Schneider Electric and Emerson Network Power.

The difficulties around selling flywheel UPS have already pushed two small companies into what appear to be distressed deals. Pentadyne’s disintegrating sales led the company to divest its manufacturing business in 2010 to Phillips Service Industries, a government contractor that was one of its customers. It was rebranded and now sells as POWERTHRU. Meanwhile, in 2014 Vycon sold to and is now a subsidiary of Calnetix, which makes generators and other power systems in and out of the datacenter.

As for who might acquire Active Power, we struggle to come up with many buyers. Private equity firms might view the company’s offering as ‘tried and failed’ and it could also be suffering from pitch fatigue as it’s been in the market for about 20 years without a breakthrough. Major industry players such as Schneider Electric’s IT division, Emerson Network Power and Eaton might have even less appetite, as Active Power’s flywheel competes head-on with battery UPS. We see two potential avenues for Active Power to pursue beyond datacenters: generator manufacturers and vendors with a focus on micro-grids.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Datacenter asset sales up sharply in 2016

Mark Fontecchio

Contact: Mark Fontecchio

Big datacenter companies are munching on the crumbs of their earlier feast. Massive datacenter consolidation in recent years has left the market with few large targets available, yet that doesn’t mean activity is dead. While overall hosted services M&A has dropped in value this year, the volume and value of asset acquisitions in that category has risen, according to 451 Research’s M&A KnowledgeBase. So far in 2016, big datacenter vendors are expanding their portfolios at a bite-sized pace.

Hosted services M&A value sits at $1.8bn year to date, off 53% from the same period last year. Yet asset sales are on pace to rise by a factor of 21 and account for 85% of 2016’s deal value, and have already surpassed the combined totals of 2014 and 2015. Even if you back out Equinix’s $874m divestiture this month of eight facilities to Digital Realty – an unusually large asset sale – such deals are still up 50% by volume and more than 8x in value.

Bolting on a few facilities at a time was always part of a multipronged strategy by the biggest datacenter operators, and it’s become more prominent as several of them have been taken off the market in the past couple years. Largest among them were Telx, Latisys and ViaWest in the US and TelecityGroup and e-shelter in Europe. With fewer sizable targets to pursue, providers have opted to purchase facilities singly or in small clusters, largely to expand geographically, resulting in transactions such as Digital Realty reaching for Equinix’s datacenters, CyrusOne paying $130m in a sale/leaseback deal for a facility in Illinois, Zayo buying a datacenter in Dallas and the always-active Carter Validus Mission Critical REIT purchasing facilities in Texas and Georgia.

We expect the trend to continue this year. While there are still some large potential whole-company targets, they are few and far between. Interxion is the most visible. Earlier this year, it was rumored to be in talks to sell to Digital Realty Trust. That provider’s recent acquisition of eight Equinix datacenters muted that talk. Meanwhile, Verizon divesting facilities from its Terremark buy in 2011, or CenturyLink shedding some of its datacenters, could make for big-ticket transactions.

Hosted services M&A YTD to 5-24-16

Digital Realty buys eight datacenters from Equinix to expand European presence

Mark Fontecchio

Contact: Mark Fontecchio

Digital Realty Trust pays Equinix $874m for eight European datacenters that the target needs to unload as a condition of its antitrust clearance from the European Commission for its $3.6bn purchase of TelecityGroup last year (seven of the eight properties in today’s deal are Telecity facilities). Digital Realty, for its part, obtains an instant presence in central London along with a European retail colocation footprint to complement its $1.9bn Telx Group buy in the US last year.

With the move, Equinix sheds about 20% of the facilities and operational square footage that it picked up when it agreed to acquire TelecityGroup. Digital Realty is paying 13x projected 2016 EBITDA, suggesting that Equinix was able to fetch a decent price despite the urgency behind the sale.

Most facilities divested by Equinix are older and have a stable base of clients that include IT service providers as well as financial services, digital media and content companies. Digital Realty has also granted Equinix a future option to purchase two of its datacenters for $215m. Located outside of Paris, the two facilities total about 140,000 operational square feet, and Equinix already operates there under a leasehold agreement.

Today’s deal also creates challenges for Interxion, a multi-tenant datacenter vendor that was set to be purchased by Telecity before Equinix swooped in and bought the would-be acquirer. Digital Realty was high on the list of potential Interxion suitors, but has now shown that it has other options for spreading its business into Europe.

Greenhill & Co advised Digital Realty on today’s transaction, which is expected to close in Q3.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Hosted services M&A value craters, yet activity still healthy

Mark Fontecchio

Contact: Mark Fontecchio

The value of hosted services M&A crashed to Earth in Q1, despite an uptick in deal volume. Following a boom of six consecutive quarters with more than $1bn in deal value, last quarter saw less than $300m in transactions, the lowest total in four years. The downward movement in hosted services reflects the broader tech M&A sector, which saw a slowdown as credit markets tightened and stocks gained volatility. In addition to that, there just aren’t many large-scale pairings left to be had. The US hosting market underwent a strong period of consolidation over the past few years, and Europe’s not far behind it.

Asset acquisitions, such as one-time datacenter deals, accounted for one-third of the activity in hosted services in the quarter as large providers made modest purchases to meet demand and enter new markets. Regional expansion transactions included serial acquirer Carter Validus buying two facilities in Georgia and Texas, and Zayo Group scooping up a 36,000-operational-square-foot datacenter in Dallas. These acquisitions fit one of the three major trends we anticipated for hosted services M&A in 2016: that datacenter operators would continue to grow regionally through M&A. To boot, the biggest hosted services transaction was the $130m leaseback agreement between CyrusOne and CME Group for an 80,000-operational-square-foot facility in Aurora, Illinois.

Meanwhile, service providers didn’t spend much to move up the value chain into managed services and similar segments. Instead, they opted to stay within their wheelhouse – nearly 43% of hosted services deals last quarter were colocation acquisitions, nearly double the portion from a year earlier. We expect those types of transactions to pick up the rest of the year alongside continued geographic datacenter consolidation. Overall hosted services M&A will also likely accelerate, as the first quarter is historically the year’s slowest in both volume and value.

Hosted services M&A by quarter Q1-2014 to Q1-2016

A new face for Google’s enterprise cloud

Brenon Daly

During last week’s GPC NEXT 2016 conference, it became pretty clear that Google is hoping that Diane Greene can do for the enterprise cloud what Andy Rubin did for mobility. In both cases, the search giant has set about acquiring a well-known ‘face’ to give it a credible and visible presence in a market that it cannot organically move into but – at the same time – can’t afford to miss. (See our full report on the conference, where the company bolstered its Google Cloud Platform with multi-cloud management, a machine-learning engine and more scalable containers, among other announcements.)

A decade ago, Google’s acquisition of Android Inc not only brought the company a fledgling OS for mobile phones, but also included the high-profile figure of Rubin. From those early days, Rubin served as a kind of ‘rock-star engineer’ as Android soared to become the world’s most-used mobile OS. (Rubin stepped out of his role in Google’s mobile business in 2013 and left the company altogether the following year.) More recently, Google made what could be characterized as one of the tech industry’s largest-ever ‘acq-hires’ when it paid $380m in cash and stock four months ago to snag bebop, a startup headed by VMware cofounder (and Google board member) Diane Greene.

Just as Rubin served as a senior VP at Google as part of his company being acquired, Greene is serving as a senior VP at Google as part of her company being acquired. However, where the parallel breaks down between the two executives is around timing. Google bought Rubin’s company in August 2005 – a full two years before Apple introduced its iPhone. In contrast, Google purchased Greene’s company just last November – nearly a decade after Amazon launched its Amazon Web Services and had grown it to a $10bn run-rate business. (Click here to to read more about the remarkable growth of AWS.)

That’s not to say that Google, led in its efforts by a proven executive such as Greene, can’t make inroads into the enterprise cloud arena, thereby closing the gap with AWS and second-place Microsoft Azure. After all, the company wasn’t anywhere among the earliest search engines, but it overtook every single one of them as it netted billions of dollars on its way to becoming the world’s most-popular search engine.

But there are challenges in Google’s ‘people and products’ strategy, as demonstrated by Rubin’s own experience at the company after he left the Android division. A true gadget guy, Rubin moved over to head the search giant’s grandly ambitious robotics unit when it launched in 2013. It was built on a series of acquisitions, most notably the December 2013 pickup of Boston Dynamics. However, Rubin couldn’t replicate in Replicant (the name for Google’s robotics business) the success he had with Android, and left the company in 2014. Google is now reportedly in the process of selling off and repurposing the Replicant assets.

Cloud computing as a service MarkMon

Source: 451 Research’s Market Monitor

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Datacenter consolidation hits a record pace as Europe gets more international

Scott Denne

Contact: Mark Fontecchio

Global datacenter consolidation in 2015 is on a tear, and the reason varies by continent. European MTDC suppliers on the hunt for regional diversity are printing an unprecedented increase in the number and value of deals, while North American providers are outpacing overall M&A volume as they move up the stack to offer more managed services.

Through the first seven months of this year, there have been 11% more tech deals compared with 2014, yet colocation and hosting transactions are up 49%, according to 451 Research’s M&A KnowledgeBase. Western Europe alone is up 67% in datacenter deal volume. Datacenter consolidation is clearly outpacing the rest of the field.

Western European datacenter deal value has skyrocketed more than the rest. Last year, 4% of all datacenter M&A value went to Western European targets; this year, it’s half. Equinix buying UK-based TelecityGroup accounts for most of that – the $3.6bn price is the largest datacenter transaction in the KnowledgeBase. As we have previously noted, one of the key reasons for all of the consolidation activity in Europe is because customers in traditional markets are seeking reach into locations where new builds are difficult. The highly fragmented European market still has many regional providers with significant pull in their locales. They are now being subject to M&A conversations as bigger players look to enter territories without building new facilities.

In North America, it’s different. While geo-based deals are still aplenty (e.g., CyrusOne’s $400m purchase of Cervalis ), more large transactions have focused on providers moving up the stack and offering additional managed services. Digital Realty’s reach for Telx and QTS Realty’s pickup of Carpathia Hosting are prime examples.

Biggest datacenter deals of 2015

Date announced Acquirer Target Target HQ Deal value
May 29 Equinix TelecityGroup Western Europe $3.6bn
July 14 Digital Realty Trust Telx Group North America $1.9bn
March 2 NTT Communications e-shelter Western Europe See estimate
January 14 Zayo Group Latisys North America $675m

Source: 451 Research’s M&A KnowledgeBase

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Digital Realty peers into new business with Telx purchase

Mark Fontecchio

Contact: Mark Fontecchio

Digital Realty Trust (DRT) buys Telx Group, moving into the interconnection business and adding a services element to the primarily REIT company. DRT is paying $1.9bn to acquire Telx from private equity firms ABRY Partners and Berkshire Partners, a price that represents a valuation increase of 5-6x over what Telx sold for to ABRY/Berkshire in 2011, according to 451 Research’s M&A KnowledgeBase.

This takes DRT into a more services-oriented business, shifting its strategy and putting it into direct competition with one of its key tenants, Equinix. The services aspect will reduce margins yet provide higher revenue per square foot. In that respect, it has some similarities to a deal in May, when REIT firm QTS Realty Trust paid $290m for Carpathia Hosting to move up the stack.

Telx has 20 facilities, mainly in top US markets, with a total of 1.3 million gross square feet of space. DRT has a similar global footprint to Equinix but is missing interconnection options outside of the US. We wonder if Interxion could also be a potential target, in the ‘you might as well go big or go home’ philosophy. Picking up Interxion – recently left at the altar when would-be acquirer TelecityGroup was bought by Equinix – would provide DRT interconnect assets in Europe as well.

There have been 16 interconnection/peering deals dating back to 2002, according to the KnowledgeBase. Telx – with its sales to GI Partners, ABRY/Berkshire and now DRT – has been by far the biggest target, accounting for three of those 16 transactions and almost 95% of the disclosed and estimated value.

Bank of America Merrill Lynch and Morgan Stanley advised Digital Reality, while DH Capital and Barclays Capital banked the sellers. For more real-time information on tech M&A, follow us on Twitter @451TechMnA.