Data center market M&A deals hit new high in 2020

The dollar value of data center merger and acquisition deals in 2020 blew past the record set in 2017, soaring to $30 billion, according to a research report released by the Synergy Research Group.

Some 113 deals valued at $30.9 billion were completed by the end of November, with several others that Synergy expects to be finalized by year's end. The firm expects the final number of data center market deals to surpass the number of deals completed in 2018 and in 2019. 

 Not only was the pandemic a major force in driving much of the M&A activity, the other factor was the aggressive move on the part of users to the public cloud, said John Dinsdale, chief analyst at Synergy Research, and secondarily the move the hybrid clouds, a trend he expected to continue into the new year.

"There's a lot of talk about hybrid clouds contributing to these deals, but you shouldn't see that as a barrier to growth of public cloud," Dinsdale said. "By mixing and matching public cloud services and private IT assets, hybrid cloud helps to push more enterprise workloads onto public cloud data centers."

The report focused on all colocation providers, cloud providers and investors in those businesses. Private data centers were excluded from the research because it is rare that enterprises invest in private data centers as "most are going in the opposite direction and divesting," Dinsdale said.

Running your own data center is difficult, expensive and is a major distraction from focusing on more important initiatives.

This current drive to find new sources of investment capital is fueled by an inexhaustible demand for data center capacity, he said. Large data centers' quest for more capacity will continue into 2021, Dinsdale said, as data centers continue to gravitate toward outsourcing.

"Running your own data center is difficult, expensive and is a major distraction from focusing on more important company initiatives," Dinsdale said. "Enterprises have moved more towards hosted services, which are now predominantly cloud-based, as well as the use of colocation facilities. Both of these can help cap or reduce spending on-premise data centers."

Corporate users were moving their operations to the cloud even before the pandemic, the report stated. But the unrelenting increase in data generated by the proliferation of more capable applications and smart devices has meant more data, resulting in more servers and more external data centers. Finally, with large data center owners requiring a global data center footprint to remain competitive, acquisitions are the most efficient way of meeting that objective.

This increased demand for data center capacity stretched the funding capabilities of data center operators, which further stimulated the need for private equity investments, Dinsdale noted.

"Then along comes COVID-19, which adds more fuel to the fire of these trends, dramatically accelerating the growth rate of cloud usage the past several months," Dinsdale said.

Since 2015 there have been 483 closed deals with an aggregated value of $107 billion, according to Synergy. That aggregated deal value over the past five years is split evenly between public companies and private equity buyers, although private equity buyers account for 59% of the deals. Since 2015, the largest deals to be closed are the acquisitions of Interxion and DuPont Fabros by Digital Realty, the acquisition of Global Switch by a group of Chinese investors and the acquisitions of Verizon data centers and Telecity by Equinix.

In another study released earlier this month, Synergy reported that enterprise spending on cloud services received a significant boost in the third quarter with COVID-19 driving changes in enterprise behavior and speeding up the transition from on-premises operations to cloud services.

With many large corporations focused on establishing hybrid cloud deployments, Dinsdale said public clouds are more responsible for driving the growth in large data centers this year.

"There is a lot of talk about hybrid cloud, but you shouldn't see that as a barrier to growth of the public cloud; it is actually a stimulant in many ways," Dinsdale said. "By mixing and matching public cloud services and private IT assets, hybrid cloud helps to push more enterprise workloads onto public cloud data centers."

Investors in China have been more aggressive in acquiring large data centers over the past few years. One such example is the $8 billion purchase of Global Switch, the fourth largest wholesale data center operator in the world, by Jiangsu Shagang Group Co., one of the largest steel makers in China. Likewise, GDS Holding Limited, with a market cap of $7 billion and the largest carrier-neutral data center provider in China, has been aggressively collecting data centers in and outside of that country.

"GDS is acting a bit like Equinix/Digital Realty, aggressively acquiring a big portfolio of Chinese data centers," Dinsdale said. "GDS has made 15 acquisitions over the last three years with three more deals finalized and pending closure."