There are a number of things to note about the proposed merger of Telecity and Interxion, announced this week.
Firstly, it’s not a done deal. The day before it was announced, Reuters reported that several potential purchasers were sizing up Telecity, which has been essentially leaderless since the sudden exit of founder Mike Tobin last August. And on the media/analyst call discussing the merger, current Telecity CEO John Hughes was clear that before this deal completes, an “interloper” might still derail it.
Secondly, it’s about consolidation, not synergy. Both organisations cover essentially the same territories - with Telecity adding some expanding markets like Turkey and Poland. But for the most part, the firms offer similar services in similar territories, with some obvious strengths and weaknesses in their home turf and elsewhere.
Capacity is not a choice
The market is still expanding, so it will be about new builds, not closing down and consolidating. The companies are confident new business will keep coming because, as Hughes put it “capacity is not a discretionary purchase”.
Now, though, in any region the combined provider will have to build only one site, where the separate bodies would have built two. Together, they reckon they can cut $600 million from their joint budget.
Readers here know all about efficiency, but financial analysts on the Telecity briefing used a measure which might be unfamiliar: margin per kiloWatt, or the return a service provider gets for the electrical power it buys.
One analyst estimated Telecity’s revenue at $2,500 per kiloWatt. That means $2,500 per year, I guess - and, depending whether we mean power committed or actually used, the cost could be anything up to $1,000. That return figure is one the analysts want to see the combined body improve on.
Whatever the combined firm is called, it simply has to expand beyond the bounds of Europe,
But the really interesting angle on this is the European one. The combination of the two firms makes a body which could outstrip the European market share of colocation giant Equinix - one analyst put their combined market share at 15 percent, with Equinix on nine percent.
So the giants should take note. Equinix’ EMEA boss Eric Schwartz was quick to comment that Equinix’ international standing makes it a far better bet for big customers, most of whom are global bodies themselves. Obviously, that’s exactly what we’d expect him to say in the situation.
Time to grow?
But what he says does raise questions for Telecity and Interxion, either jointly or separately. Both of them have previously argued that their geographic focus is their strength. They understand their markets, and they are big fish in a small pool, if you like.
But now the combined firm will face new issues because of its size. We might (but probably won’t ) call it Intercity or Telexion, but it simply has to expand beyond the bounds of Europe, to Asia and Africa certainly, and probably to the US, to maintain its forward momentum.
The interesting question is what form that expansion will take - and what efficiencies it will bring.
A version of this article appeared on Green Data Center News.