Equinix swallows Switch & Data

The acquisition train rumbles on.

Equinix, along with Q3 earnings, has announced that it will acquire Switch and Data in a $689 million, 80% stock, 20% cash deal, representing about a 30% premium over SDXC’s closing share price today.

This move should be read as a definitive shift in strategy for Equinix. Equinix’s management team has changed significantly over the past year, and this is probably the strongest signal that the company has given yet about its evolving vision for the future.

Historically, Equinix has determinedly stuck to big Internet hub cities. Given its core focus upon network-neutral colocation — and specifically the customers who need highly dense network interconnect — it’s made sense for them to be where content providers want to be, which is also, not coincidentally, where there’s a dense concentration of service providers. Although Equinix derives a significant portion of its revenues from traditional businesses who simply treat them as a high-quality colocation provider and do very little interconnect, Equinix’s core value proposition has been most compelling to those companies for whom access to many networks, or access to an ecosystem, is critical.

The Switch and Data acquisition takes them out of big Internet hub cities, into secondary cities — often with much smaller, and lower-quality, data centers than Equinix has traditionally built. Equinix specifically cites interest in these secondary markets as a key reason for making the acquisition. They believe that cloud computing will drive applications closer to the edge, and therefore, in order to continue to compete successfully as a network hub for cloud and SaaS providers, they need to be in more markets than just the big Internet hub cities.

Though many anecdotes have been told about the shift towards content peering over the last couple of years, the Arbor Networks study of Internet traffic patterns — see the NANOG presentation for details — backs this up with excellent quantitative data. Consider that many of the larger content providers are migrating to places where there’s cheap power and using a tethering strategy instead (getting fiber back to a network-dense location), and that emerging cloud providers will likely do the same as their infrastructure grows, and you’ll see how a broader footprint becomes relevant — shorter tethers (desirable for latency reasons) mean needing to be in more markets. (Whether this makes regulators more or less nervous about the acquisition remains to be seen.)

While on the surface, this might seem like a pretty simple acquisition — two network-neutral colocation companies getting together, whee — it’s not actually that straightforward. I’ll leave it to the Wall Street analysts to fuss about the financial impact — Equinix and S&D have very different margin profiles, notably — and just touch on a few other things.

While S&D and Equinix overlap in service provider customer base, there are significant differences between the rest of their customers. S&D’s smaller, often less central data centers mean that they historically don’t serve customers who have had large-footprint needs (although this becomes less of a concern with the tethering approach taken by big content providers, who have moved their large footprints out of colo anyway). S&D’s data centers also tend to attract smaller businesses, rather than the mid-sized and enterprise market. Although, like many colo companies, their sales forces are essentially order-takers, Equinix displays a knack for enterprise sales and service, a certain polish, that S&D lacks. Equinix has a strong enterprise brand, and a consistency of quality that supports that brand; S&D is well-known within the industry (within the trade, so to speak), but not to typical IT managers, and the mixed-quality portfolio that the acquisition creates will probably present some branding and positioning challenges for Equinix.

While I think there will be some challenges in bringing the two companies together to deliver a rationalized portfolio of services in a consistent manner, Equinix has a history of successfully integrating acquisitions, and for a fast entrance into secondary markets, this was certainly the most practical way to go about doing so.

As usual, I can’t delve too deeply in this blog without breaking Gartner’s blogging rules, and so I’ll leave it at that. Clients can feel free to make an inquiry if they’re interested in hearing more.

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Posted on October 21, 2009, in Industry and tagged , , . Bookmark the permalink. Leave a comment.

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