FOCUS NEW YORK


Issue 14, February/March


SURVIVAL OF THE BIGGEST


There’s a land grab going on in the data center space as big developers and operators rush to reshape the market. By Penny Jones


space today. So much so, that it seems the only purpose of a number of smaller players in major markets such as New York, is to feed the growth demand of the larger players who have become stalwarts of the data center colocation market. Telx, Equinix, Telecity, Digital Realty Trust are just a few of the companies that have engaged in merger and acquisition (M&A) activity.


W


Those in the boardroom may be singing all the way to the bank but in reality, finance forms only a part of the equation in today’s M&A environment for data center companies of this


size. As major city centers grow,


room becomes scarce. As markets become hotter, latency and connectivity become key issues and as data requirements grow, cloud computing, virtualization


and managed services around these come into their own.


Demand for server space is also growing. Hence, M&A for these players is not only about the cash, in many ways it is about retaining business, and in some cases it is about moving into new, key locations.


SCALING UP


Tier 1 Research senior equity analyst Aleetalynn Schenesky says smaller companies seem to be the target in this case, and the prize is either their facility, or services.


“The majority of deals made by industry providers were concluded for the purposes of scale, capacity, to gain entrance to additional geographies and/or to solidify a market position within a particular geography,” Schenesky says.


“Multi-tenant data center companies will also make acquisitions as a defensive move, such as buying a company before or to outbid a competitor so the competitor doesn’t see the advantages of the acquisition.”


28 www.datacenterdynamics.com here you are in the


pecking order is becoming increasingly important in the multi-tenanted data center


Colocation behemoth Equinix’s purchase


of Switch & Data in 2009 is a key example, according to New York-based TABB Group analyst Kevin McPartland.


“Equinix has key pockets in New York covered. It is already very much a hub for several exchanges, but it was bringing in a lot of additional customers and had to cater to these,” McPartland said.


“Switch & Data, on the other hand, was less of a hub but provided close and lower cost data center space in general proximity. This allowed Equinix to provide data center space at a much broader price point in terms of its use of space and the type of client it could pull. The ability to offer that is going to be very important for companies here in New York moving forward,” McPartland said.


Switch&Data occupied some key properties in NY, including space in one of Manhattan’s most important telecom hubs, a 15-story building on 111 8th Ave. The building housed operations for DRT, Telx and Equinix following Switch&Data’s takeover, and Google had 500,000 sq ft of office space there. After being put up for sale last year, Google bought the entire office building for US1.9bn.


Real estate investment trust (REIT) DRT’s raison d’etre is to buy data center space so it is no surprise that the company continued to acquire last year. It purchased three sites, totalling 550,000 sq ft, for US$375m from Sentinel Data Centers, a facility in Singapore’s International Business Park for SG$170m for an Asian market entry, and Rockwood Capital and 365 Main’s five-data center portfolio for a cool US$725m.


SUPPLY DEMAND IMBALANCE


“Unlike acquisitions that occurred immediately after the dot-com bust, when data centers on the market were both inexpensive and plentiful and forward- looking individuals and companies were able to acquire some top-quality facilities for pennies on the dollar, the current situation


111 8th Avenue New York


is sharply different. There are significantly fewer prime data center properties to pick up at this point,” Schenesky says.


“Prime data center facilities are now likely to attract multiple bidders at only a modest discount to construction costs, considering the continued supply/demand imbalance that has continued to widen over 2010.”


Larger properties with multiple tenants saw costs skyrocket. Smaller players with single or smaller, lower quality facilities, however, were ripe for the picking, unless they could prove they offered something different and in demand in the market, according to Schenesky.


McPartland says this has meant the market in New York has changed considerably over the last year. “There are not a lot of players left,” he says. And from where he sits, he can hear a lot of CTOs showing interest in smaller players that can prove they have the required latency, connectivity, proximity and power resources, suggesting that the time could now be right for smaller players that have ticked the right boxes to name their price. 


See articles on colocation and hosting at www. datacenterdynamics.com/focus


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