With HCTS around the corner, hosting M&A sees slowdown from record highs

by Mark Fontecchio

With 451 Research’s Hosting & Cloud Transformation Summit (HCTS) set to kick off next week, hosted services M&A activity has been a bit quiet in 2018, retreating from recent record highs. Massive multitenant datacenter (MTDC) consolidation in previous years has cut the number of sizable targets available for purchase, drastically reducing M&A spending. However, as enterprises increasingly migrate IT workloads off-premises, hosting providers are offering more managed hosting and cloud services, and inking deals to help them do it.

According to 451 Research’s M&A KnowledgeBase, hosted services acquisitions total $8.1bn in spending so far this year. That pace would put 2018’s year-end total at about $11.5bn, well below outsized spending in 2016 and 2017. That said, the flow of hosting deals has been notoriously lumpy. For example, 2016 saw nearly half of its record spending of $15.6bn come in Q4.

Could that happen again this year? While unlikely, it’s possible. The two largest strategic acquirers, Equinix and Digital Realty Trust, spent an average of $6bn on acquisitions in each of the past three years. In 2018, however, they’ve spent just a fraction of that, the only transaction being Equinix’s $781m purchase of Infomart Dallas. Equinix, with nearly $1bn in cash, is the more feasible of the two to ink a blockbuster deal in Q4, as Digital Realty is likely still working on integrating its largest-ever acquisition, the $6bn purchase of DuPont Fabros in mid-2017.

As for financial buyers, private equity firms have taken much-larger positions in hosted services recently, with five $1bn+ transactions since 2016, which is more than they inked in all of the previous decade. While the $3.8bn in spending by buyout firms so far this year exceeds all of 2017, it is still about half the record $7.6bn in 2016. One potential large target is a group of hundreds of datacenters – mostly in North America and Europe – that CenturyLink obtained in its 2016 pickup of Level 3, which could be sold together or possibly split up. There was also an activist investor pushing QTS Realty Trust to sell earlier this year following accusations of mismanagement, although that sentiment has died down a bit.

Meanwhile, most hosted services M&A this year has happened outside of strictly colocation. Of the three $1bn+ deals, two were for services other than – or in addition to – MTDC. They were Siris Capital’s $2bn purchase of Web.com (web hosting) and GTT Communications’ $2.3bn acquisition of Interoute (fiber and cloud networking). Other $100m+ transactions in cloud and managed services this year include Orange buying Basefarm and Internap reaching for SingleHop. There have even been hosting providers acquiring cloud migration and integration vendors, which we wrote about last month. Examples there include Rackspace buying Salesforce integrator RelationEdge, as well as Green House Data purchasing Microsoft integrator Infront Consulting.

For those attending HCTS, be sure to join 451 Research and ING for an opening breakfast on Tuesday morning to discuss the overall tech M&A market, which is currently running at near-record rates. That will be followed by a more focused session on Tuesday afternoon on consolidation trends in the datacenter and managed service market. We look forward to seeing many of you there.