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Why Data Center Owners Like Equinix Remain Eager to Use M&A

Steady long-term growth in server computing needs is playing a role, as are the competitive benefits of having more scale.

For a couple different reasons, data center owners such as Equinix  (EQIX) - Get Equinix, Inc. Report and Digital Realty Trust  (DLR) - Get Digital Realty Trust, Inc. Report remain eager to use acquisitions to grow their footprints.

Equinix revealed the latest in a string of M&A transactions on Tuesday morning, when it announced a $750 million deal to buy 13 data centers from Canadian telco Bell. The deal, which is expected to close in the second half of 2020, is said to give Equinix 1.2 million square feet of additional Canadian data center space, including 400,000 square feet of server colocation space, and bring its network interconnection services to seven more metro areas.

The announcement comes five months after Equinix closed a $175 million deal to acquire three Mexican data centers from telco Axtel, and two months after it closed a $335 million deal to buy Packet, a provider of cloud infrastructure services relying on bare metal servers (i.e., servers dedicated to individual clients). In recent years, Equinix has also spent $800 million to buy Australian data center Metronode, and $3.6 billion to buy 29 data centers from Verizon  (VZ) - Get Verizon Communications Inc. Report.

Digital Realty, meanwhile, is two months removed from closing its $8.4 billion deal acquisition of European data center owner InterXion. The company also spent $8 billion in 2017 to buy data center owner DuPont Fabros, and $1.8 billion in 2018 to buy Brazilian data center owner Ascenty.

Healthy secular growth drivers for colocation and interconnection services are one reason why major data center owners are comfortable with aggressively using M&A to get bigger.

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While decisions by some enterprises to shutter data centers and rely more on public cloud platforms such as AWS and Microsoft Azure can be a headwind for data center owners, the fact that cloud platforms partly rely on third-party data centers (along with internally-owned ones) is a tailwind. As is the fact that the likes of Equinix and Digital Realty provide services that allow businesses to directly connect with the networks of public cloud giants.

And more broadly, the fact that the server computing needs of enterprises, telcos and tech giants continues growing is a long-term positive for data centers, as is growing interest in supporting edge computing services that require servers to be placed close to end-users and devices.

Another factor driving data center M&A: There are clear competitive advantages to having more scale.

A larger global data center footprint is naturally more appealing to customers -- whether traditional enterprises, telcos or tech giants -- that need to support server workloads in a number of different locations, for performance, security and/or regulatory compliance reasons. And as Equinix has often been quick to point out, an interconnection platform’s ability to support more networks and exchange points increases the platform’s value proposition.

As a result, look for the likes of Equinix and Digital Realty to keep opportunistically using M&A to become bigger -- especially if interest rates for debt issued by cash-flow positive companies with strong credit ratings remain near current levels.