Equinix Expansion: Building, But Also Buying

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Why is Equinix spending $698 million to acquire competitor Switch & Data? It was a "buy vs. build" decision writ large, with data center economics driving the math. Here's what Equinix was able to buy for that $698 million (plus another $142 million to assume Switch & Data's outstanding debt):

How much would it have cost Equinix to build new data centers in those five cities? Or to build more space in New Jersey, Silicon Valley and Dallas? Equinix clearly determined that it would be cheaper to buy Switch & Data, which shares its carrier-neutral colocation model and focus on interconnections.

"While new data center builds can take more than two years in planning and construction, the acquisition of Switch and Data provides an immediate entry into several key U.S. markets where Equinix does not currently have a presence," Equinix said in a customer FAQ. "In addition, existing Switch and Data assets in markets where Equinix currently operates provide opportunities for expansion and creating additional capacity."

Just 20 Percent in Cash
The structure of the deal also allows Equinix to gain new facilities and markets with a minimal outlay of its own cash. Just 20 percent of the $689 million purchase price will be paid in cash, with the remainder being paid in shares of Equinix stock.    

In a conference call following yesterday's announcement, several analysts wondered whether the deal might invite antitrust scrutiny."Rest assured, we've looked hard at this," said Equinix president and CEO Steve Smith. "We are taking a position that the North American hosting market is a competitive market.”

But which market? Equinix says it has "low single digit" market share of a broadly-defined market that includes web hosting providers as well as colocation and wholesale data center providers. But Equinix (EQIX) and Switch and Data (SDXC) are arguably the two largest players in North America in the narrower niche of carrier-neutral colocation.

Few Details on Integration
Smith and Switch and Data CEO Keith Olsen didn't offer details on how the two companies will be integrated, but noted that the companies are familiar with one another.

"We've known Keith and his team for a long time," said Smith. "At one point we made a phone call and had a conversation. There's a common business model between these companies and there's obviously going to be overhead we can look at. Our teams have spent a lot of time together. We have a pretty good plan."

Olsen said there is some overlap in customers between the two companies, primarily among large content companies and network providers.

As for the company's facilities, there is a limited amount of duplication. While the companies share a carrier-neutral colo model, Equinix has focused on large Internet-centric markets, while Switch and Data has maintained a much broader geographics focus, serving 22 cities.

Additional Capacity for Equinix
In the markets where the two companies compete, Equinix sees opportunity. Switch and Data's data centers are 61 percent filled, compared to an 80 percent utilization rate for Equinix. That additional space will be particularly welcome in Silicon Valley, northern New Jersey and Dallas.

"This gives us more capacity in three markets where we have high fill rates," said Equinix CFO Keith Taylor. "We're going to take advantage of that capacity. We think that capacity will fill up more rapidly than we expect." Taylor and Smith said Equinix had no plans to shelve any of its expansion plans.

In the past, Equinix has invested in upgrades to bring acquired facilities on par with its company-built data centers, a process sometimes referred to as "Equinization." Smith hinted that they may follow a different path with Switch and Data's facilities.

"We are still in the analysis phase," said Smith. "It will probably give us the opportunity to tier our services. It provides us the ability to support multiple kinds of customers."