Par 1 of our four-part special on the year’s M&A activity

If you followed industry news, you could not miss the recent spike in acquisition activity in the colocation and hosting space both in the US and in Europe. M&A deals consistently made headlines as companies battled for market share and space: from large deals to small.

In the US, the starkest trend has been consolidation in the nation’s second-tier markets, with acquisitions of both smaller companies by large established players moving into second-tier markets and acquisitions by smaller players backed by private-equity firms of other smaller players in those markets. There was also a number of cross-border acquisitions for international expansion, most of them in the UK, but some significant ones in Asia as well.

In general, the market is continuing to consolidate and, according to Kelly Morgan, senior analyst at 451 Research, is poised to show more M&A activity in the near future. Consolidation in the lower-tier markets is happening primarily because tier-one markets – New York, Silicon Valley, Chicago and so on – are already saturated by big players. The second-tier markets have many smaller one-site companies that do not have the capital to grow beyond their current size. These players are looking for partners to help them expand.

PE backing – a growth hormone

A prime example has been Xand Corp. When private equity player Abry Partners bought this data center provider in October 2011, it had one data center in Westchester County, New York (about 30 miles outside of New York City). In April this year, Abry’s money in hand, the company merged with Access Northeast, which added two data centers in Massachusetts and one in Connecticut to its portfolio. It followed this deal with a merger with DBSi in July, which expanded its portfolio by three more data centers in Pennsylvania.

Through these two deals, Xand became a major regional player in northeastern US. Located between New York and New Jersey, DBSi’s Philadelphia location puts it in a great position to compete in the New York market. The company has earned a good reputation in Philadelphia, Morgan says, and has plenty of expansion space. Being in Philly may also provide it with a cost advantage over providers in prime New York and New Jersey markets. Covering three regions, Xand’s facilities can also act as disaster-recovery sites for each other.

Another recent example of consolidation in second-tier US markets was acquisition of the Washington State provider TierPoint by Cequel Data Centers, a colocation provider owned by private equity firms Thompson Street Capital Partners and Charterhouse Group. The acquisition has given the buyer a three-site foothold in the greater Spokane area, from which it can serve customers in the Pacific Northwest. Cequel also has data centers in Texas and Oklahoma.

In a different type of a transaction, wholesaler CoreSite purchased Comfluent, which gave it instant access to the Denver market. The large US player bought Denver’s two-data-center colocation provider for US$3m, gaining not only the data centers but also control of the Rocky Mountain Internet eXchange.

If you cannot build, buy

While smaller players buy to become bigger, already big companies often buy internationally. Digital Realty Trust bought what was called the Sentrum Portfolio in London. The deal gave Digital an additional 760,000 sq ft of  space in Woking, Watford and Croydon for a total of US$1.1bn.

In addition to giving the San Francisco-based wholesaler income-producing properties, the deal gave Digital immediate available space in a highly active data center market. According to Morgan, Digital did not have much available space left in its other London properties.

Another company that bought space in the UK was NTT Communications. The Japanese giant bought a controlling interest in the UK operator Gyron Internet, gaining one data center near London that is already online and has tenants, including Adobe and Symantec, and two more facilities under construction.

In Morgan’s opinion, both Digital’s and NTT’s UK deals were most likely in response to customer requests for footprint in the UK. It is difficult and expensive to build in London, so buying an existing property is an easier way to go market.

Another market where an acquisition is a much easier path than new construction is Frankfurt. This was US-based Equinix’s reasoning when it bought ancotel GmbH in a deal closed in July.

The purchase gave Equinix a data center in this major European market and a large network with more than 400 customers, about half of whom are network providers. Ancotel has always focused on attracting and interconnecting local and regional telecom providers, Morgan says.

Equinix made another acquisition this year that gave it additional presence in China, an extremely difficult market to get into for a foreign provider. In May the company announced an acquisition of Asia Tone, a Hong Kong-based data center provider with a strong presence in mainland China. It ended up with data centers in Hong Kong, China and Singapore, totaling nearly 700,000 sq ft. Most of this, including 300,000 sq ft that is under construction, is in China, according to Asia Tone.

Morgan expects to see more examples of the consolidation trend very soon, before the end of the year. “We’re expecting to hear about more M&A in the fall,” she says. “There are a lot of deals underway.”

This article was originally published in the DatacenterDynamics FOCUS magazine, Issue 25. Subscribe for free on the DCD website.