Why QTS Dished Out $326M on Carpathia Hosting

Scale and breadth of services offered appear to be two of the key attributes a data center provider must have to succeed in today’s market, and it’s both of those things that QTS Realty Trust was after when it acquired competitor Carpathia Hosting in a $326 million deal announced in May.

Besides about 230 additional customers, the acquisition added substantial managed hosting capability to the QTS product portfolio and more than doubled the amount of data centers in its fleet, including, for the first time, facilities overseas. International market where QTS now has presence are Toronto, London, Amsterdam, Hong Kong, and Sydney.

Consolidation in the data center provider space has been a running theme of the last several years, and the deals that took place usually revolved around bulking up a company’s ability to be a one-stop shop for international data center infrastructure and the full gamut of services. Digital Realty bought Telx to expand its retail colo and interconnection services, Equinix bought TelecityGroup to make sure it is the biggest player in Europe, and NTT bought a majority stake in RagingWire to grow its US footprint and e-shelter in Germany as a way to expand in the European market, to name a few of the most recent high-profile examples.

The one thing that stands out about the QTS-Carpathia deal is Carpathia’s sizable federal government business. QTS has put a lot of effort into growing its play as a government data center service provider in recent years, which the acquisition boosted in a big way.

Before the acquisition, the contribution of government deals was in the single digits as percentage of total revenue QTS raked in, Dan Bennewitz, the company’s COO, said in an interview. That portion is now about 15 percent, including government customers at federal, state, and local levels, he said.

The deal brings additional authorizations for serving government clients, including FedRAMP, a must for providing cloud services to federal agencies, and HIPPAA compliance, which is a set of security and privacy rules for individually identifiable health information.

Much of the demand in the public sector is for hybrid services, John Lind, VP of federal markets at QTS, said. These deals are usually done through systems integrators, and QTS sees a lot of requests for proposals from integrators that include some hardware in an on-prem facility, some managed hardware in a colocation data center, and some cloud services, he said.

The federal government’s “cloud-first” push is driving a lot of this, and so is the desire to shift IT from being a capital expense to an operational one, according to Lind.

But government business wasn’t the only reason QTS acquired Carpathia. Another reason was its managed and cloud services portfolio, which took the size of QTS’ cloud and managed services from 10 percent of total revenue to more than 25 percent, Bennewitz said.

Carpathia’s bread-and-butter is its managed hosting business. “They’re primarily a managed hosting company,” he said.

The acquisition added 13 data centers to the 12 QTS had before. Unlike QTS, however, Carpathia leases its data centers. The fate of those leases will be decided on a case-by-case basis. Where it makes sense, the sites will be consolidated into the massive QTS facilities once leases expire. QTS will renew leases in locations that fit well strategically, Bennewitz said.