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If there was one easy critique to make about Peak 10 before it announced the agreement to acquire ViaWest earlier this month it would be that it didn’t have any data centers west of Kentucky.
“They didn’t’ have anything very far out west so disaster recovery possibility and overall reach could’ve been better. The ViaWest acquisition solves that,” Dan Thompson, senior analyst at 451 Research, said.
If and when it closes, the $1.67 billion deal to take Denver-based ViaWest off the balance sheet of its current owner, the Canadian telco Shaw Communications, will not only give Peak 10 nation-wide reach, it will make it one of the two biggest player in so-called tier-two US data center markets. The only other player in those markets of comparable size is TierPoint, according to analysts at Structure Research, who were hard pressed to determine which of the two companies would actually be bigger post-merger, concluding at the end that they would share the number-one spot among secondary-market players in terms of colocation revenue.
The acquisition expands Peak 10’s reach from 16 data centers in 10 markets to 40 data centers in 20 markets, reaching as far west as Portland. The combined company’s total data center capacity will be 2.7 million square feet and 90MW of power, Mike Fuhrman, Peak 10 CTO, said in an interview with Data Center Knowledge.
What’s the Big Deal with Scale Anyway?
So, why is scale so important for a data center provider? Mergers by companies targeting top markets and those focusing on secondary markets have accelerated recently, with most of the deals made primarily to expand the buyer’s scale.
Besides the obvious benefits of economies of scale, expanding into new geographic markets is a key way for providers to grow revenue. “There’s a tremendous pressure to continue to grow,” Thompson said. “That’s why you see a lot of them scaling out.”
After being in any single market for five or so years, your growth potential in that market starts to wane, and entering new markets is a way to counter that.
Specifically in Peak 10’s case, expanding geographic reach is also a way to attract larger customers than its traditional small and mid-size business base. Larger enterprises typically need data center capacity in more than one or two locations, so they naturally gravitate toward national players.
Peak 10 has been adding larger customers to its base over the last two to three years, and broadening its geographic reach was necessary to continue that trend, Fuhrman said.
TierPoint has been on a similar trajectory, according to Philbert Shih, managing director at Structure, and it now has a rival to compete with toe-to-toe. “Both companies have trended toward bigger customers over time, with bigger spend,” he said.
Both companies also have a variety of cloud and managed services capabilities, and so does ViaWest, which in addition to scale also bulks up Peak 10’s skill set in that department. Such up-the-stack services, integrated with colocation, are important for a service provider catering to SMBs and larger enterprises who don’t necessarily have those skills in-house.
Roughly 60 percent of Peak 10’s revenue today comes from non-colocation services, Fuhrman said. The rest is split about evenly between cloud (including private cloud and multi-tenant disaster recovery) and managed services. He expects the non-colocation portion to increase over time but doesn’t forecast a slow-down in the colocation business.
While ViaWest and Peak 10 have many similar capabilities, the area where the deal brings net new skills is consultative professional services around security and infrastructure. The bulk of ViaWest’s capabilities in this area came when it acquired AppliedTrust in 2015. Now, 70-plus experts across business intelligence, voice, video, and other enterprise IT infrastructure domains join Peak 10, which would otherwise rely on partners for that expertise, Fuhrman said.
A growing area within the managed services category for companies like Peak 10 is managed public cloud. ViaWest adds a managed Amazon Web Services capability to Peak 10’s portfolio, including professional services to help clients integrate public cloud into their architecture. Fuhrman said the company plans to grow that capability by adding more cloud providers to the mix, such as Microsoft Azure and Google Cloud Platform. “I definitely see that as an opportunity for us,” he said.
A Wave of Consolidation
This is the latest in a string of acquisitions in the data center provider industry as it goes through a wave of consolidation. Also this month, Digital Realty Trust announced its blockbuster $7.6 billion acquisition of the pure-play wholesale data center landlord DuPont Fabros Technology. Earlier this year, CenturyLink offloaded its data center business to a group of investors that later launched a data center provider called Cyxtera, and Equinix closed its $3.6 billion acquisition of a massive Verizon data center portfolio. The CenturyLink, Verizon, and Shaw deals are similar in that the three telcos all have sold data center companies they acquired a few years ago.
Also this year, a company called Digital Bridge continued the buying spree it started in 2016, acquiring Silicon Valley wholesale heavyweight Vantage Data Centers, the regional Utah player C7 Data Centers, and two individual facilities from 365 Data Centers. In April, 365 was itself acquired by a group of investors intent on growing it by buying up more data center companies.
No Plans to Enter Top Markets
While its strategic focus has been in tier-two markets, the ViaWest acquisition gives Peak 10 presence in the red-hot Dallas-Fort Worth market. But Fuhrman doesn’t expect the company to enter into more top markets any time soon. He sees a significant growth opportunity in secondary markets today, as the Internet of Things drives demand for compute capacity everywhere, and on the map of the two companies’ combined footprint, almost every tie-one market has a facility that’s tethered to a Peak 10 or a ViaWest data center, he said. “We’re pretty happy with the reach that we have with these 40 data centers in 20 markets.”