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www.redcapgroup.com 1
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
INTRODUCTION
This report focuses on the emerging area of managed and hosted
services for small and mid-sized businesses. In particular, the report
looks at the consolidation activity currently taking place and the
acquisition strategies being pursued by larger players in the telecom,
IT services, hosting and data center businesses as these players look
to evolve and migrate their businesses to become the leading cloud
service providers of the future.
OVERVIEW
The IT services sector is an extremely large and diverse industry.
There are literally hundreds of players with half a billion dollars or
more in revenue providing some mix of connectivity, systems inte-
gration, hosting, managed services or product sales to small and mid-
size businesses. As the IT services space evolves and SMB custom-
ers continue migrating to managed services and cloud offerings, this
shift presents a significant opportunity for established players who
can develop the right models and leverage their existing relationships
to capture a greater share of their customers IT wallet while estab-
lishing high margin, contractually recurring revenue streams.
Not surprisingly, many large players are using M&A to aggressively
expand their businesses. Telecom players are acquiring data center
players; data center players are acquiring hosting providers; and
hosting providers are acquiring each other to broaden their solutions.
And so as not to be left behind, integrators are acquiring managed
service providers to try and move to recurring revenue models. Even
large IT players like Best Buy and Dell have made acquisitions in the
managed services space. And of course, private equity players are
always there, buying or selling wherever the opportunity seems right.
So how can a smaller, emerging players make sense of this landscape
and understand the trends impacting their decision around when and
to whom to sell. This report looks at M&A activity across a broad
range of subsectors comprising cloud and IT services for small and
mid-size businesses. In doing so, we identify some of the key trends
shaping consolidation activity.
Section 2 graphically takes a quick look at some of the consolidation
activity for a few large players to highlight some of the key acquisi-
tion trends taking place. Section 3 focuses on the key valuation met-
rics and how they vary across sectors and business models. Section 4
looks at acquisitions within each category of acquirer to see where
there are acquisition strategies that cross business lines. Of course
telecom players acquire telecom players and data center players ac-
quire each other. But are the they acquiring MSPs or integrators?
Are distributors like Arrow moving upstream through acquisition?
These are the key acquisition trends this report aims to identify as
well as to understand whether an unusual deal (like Best Buys acqui-
sition of MSP Mindshift) is really reflective of a trend or simply a
one-off deal that may not likely be repeated. Finally, Section 5 pro-
files many of the most active acquirers in seven different subsectors,
shown in the index at the left. For each, weve identified some of
their recent acquisitions, relevant business activity, and speculated on
what types of acquisitions they may make next.
Because this report covers a rather wide swath, weve not attempted
to included every transaction or every player, but rather identify some
of the highlights that we think are important to understand, and which
are reflective of trends that will have a meaningful impact on the
evolution of the competitive landscape over the next several years.
INSIDE THIS ISSUE Page
1. Introduction 1
2. Subsector Consolidation 2
3. Valuation Metrics 4
4. M&A Activity by Sector 8
5. Acquirer landscape 29
Managed Hosting
Data Center
Telecom Service Providers
Systems Integrators
New Voice Services
Large IT Equipment Players
IT Distributors
Contact:
Russell Crafton, Partner [email protected] 212.508.7110
July 2012
Redwood Capital: 885 Third Avenue, 25th Floor New York, NY 10022
M&A in the Cloud and IT Services Sectors The Evolving Cloud Service Providers
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www.redcapgroup.com 2
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Consolidation in the IT Services space is beginning to cross sub-sectors, with many
players beginning to use M&A to expand their solution sets and move into higher
margin offerings. For example, whereas the data center space has been actively
consolidating for the past decade, telecom players have now moved in, as evi-
denced by CenturyLinks acquisition of Savvis and Verizons acquisition of Terre-
mark. Many industry watchers have long expected that the data center business,
being a heavy facilities-based business, to eventually find its way into the telecom
umbrella.
While other sectors in the cloud services market may be at a somewhat earlier stage
regarding consolidation, we expect that this too may likely change. The managed
services and hosting areas are two spaces we think are very likely to see increased
M&A interest. BestBuys recent acquisition of IT managed services player Mind-
shift is one example, we think, of how larger IT equipment vendors selling into the
SMB customer base will look to acquire services offerings as well to grow their
share of wallet and maintain a strong presence and control of the customer.
SUBSECTOR CONSOLIDATION
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Hosted Solutions
QCom Corp
Xeta
Cavalier Telephone
McLeod
Embarq
Qwest Wam!Net
Cable & Wireless America
Napster
DealTree
Dynamic Digital
Union Square Tech
Invision.com
Collaboration Online
CloudSwitch
MCI
DataReturn
Accris
DS3 DataVaulting
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www.redcapgroup.com 3
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Other moves that we think may be reflective of things to come include Arrow, a
large distributor that has recently made moves upstream with its acquisitions of
telephony integrators Shared Technologies and Cross Telecom. Many distributors
have pondered moving into the integration space for some time, and the competi-
tive implications with their channel, but few have made any significant acquisitions
(with CDWs acquisition of Berbee a few years ago being a key exception). We do
think the distributors are extremely well positioned to sell into the SMB space and
may look at other businesses, such as hosting, that they can push through their ex-
tensive channel networks to easily reach a major share of the SMB market.
Finally, there are many players, such as J2 Global, that will continue to purse a
strategy of remaining focused on their core business, in J2s case, the offering of
SaaS applications for SMBs in UC and related applications. Perhaps J2 could even-
tually be the right add-on for an Arrow or Avnet that wants to have a set of hosted
apps to sell through its reseller network.
SUBSECTOR CONSOLIDATION (CONTINUED)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ICC NetASPx
Abanza & Jupiter
WayThere
RoadRunner
Cross Telecom
Shared Technology
Nu Horizon
Richardson RFPD
Zintel
Lanslide Tech
Offsite Backup
Protus IP
Venali
FuseMail
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www.redcapgroup.com 4
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Shown below, and on the next several pages, are a variety of metrics providing
trading valuations for public IT services players. While the markets have improved
significantly over this time, although lots of ups and downs, some areas of IT have
done very well while others have significantly lagged.
As shown in blue in the bar chart below, data center and managed hosting players
all trade at very strong EBITDA multiples, in large part due to the significant
growth these players have demonstrated. Not surprisingly, growth is what the mar-
ket focuses on the mostas indicated by the relatively good degree of correlation
in the scatter plot and regression line shown at the lower right.
Given the significantly higher valuations for recurring revenue businesses, many
players in more traditional spaces such as system integration and distribution
(which trade at 4.8x and 4.2x EBTIDA respectively) are actively trying to migrate
their businesses to more of a recurring revenue model. For integrators, this in-
volves several strategies including the migration to managed services business
models and the introduction of complementary lines of business such as cloud in-
frastructure services where revenue is on a contractually recurring basis. These are
core trends playing out across the IT services landscape where nearly every reseller
and integrator are introducing managed services models.
For distributors and consultants, their future strategies pose much greater challeng-
es as it requires more of a fundamental shift in their businesses. The distribution
business in particular has always operated on very tight margins (hence the 0.1x
revenue multiple below) and consulting business face the challenge of lots of one-
time project oriented work. While both consulting and distribution are important
functions that will always remain, they do not present the same high growth as oth-
er spaces and thus suffer on the valuation front.
Sources: Capital IQ, Venturewire, Redwood Capital
2012 EBITDA and Revenue Multiples
VALUATION METRICS
2012 EBITDA / 2012 EBITDA Growth Rate
13.9x
9.2x
10.9x
5.9x
8.6x
4.2x4.8x
8.1x
7.3x
3.1x 3.4x
2.4x
1.2x
0.1x 0.4x
1.4x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Data Center M anaged
Hosting
Web
Hosting
CLECs New Voice
Services
Distributors Integrators Consultants
EBITDA Revenue
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
0% 10% 20% 30% 40% 50%
2011-2012E EBITDA Growth Rate
2012E T
EV
/ E
BIT
DA
Mu
ltip
le
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www.redcapgroup.com 5
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Sources: Capital IQ, Venturewire, Redwood Capital
Publicly Traded IT Services Companies
$ millions
Stock 52 Week Market
Company Name Price High Cap TEV Revenue EBITDA Revenue EBITDA Revenue EBITDA Revenue EBITDA CY 2011A CY 2012E CY 2011A CY 2012E
Data Center
Equinix $171.9 $178.4 $8,265 $10,500 $1,220.3 $476.8 $1,606.8 $666.2 $1,901.2 $876.9 18% 32% 6.5x 5.5x 15.8x 12.0x
Digital Realty Trust 74.7 76.0 8,234 12,117 870.7 503.2 1,067.7 606.7 1,178.6 725.3 10% 20% 11.3x 10.3x 20.0x 16.7x
Telecity Group 12.7 12.9 2,530 2,788 318.0 135.1 388.3 171.9 466.3 213.7 20% 24% 7.2x 6.0x 16.2x 13.0x
Median 18% 24% 7.2x 6.0x 16.2x 13.0x
Mean 16% 25% 8.4x 7.3x 17.3x 13.9xManaged Hosting
Rackspace $44.7 $60.6 $6,038 $5,995 $780.6 $217.6 $1,025.1 $292.7 $1,322.9 $454.4 29% 55% 5.8x 4.5x 20.5x 13.2x
Internap 6.7 8.0 340 416 244.2 34.6 244.6 39.4 276.4 52.5 13% 33% 1.7x 1.5x 10.6x 7.9x
j2 Global 25.6 32.7 1,186 1,021 255.4 118.4 330.2 155.7 354.4 184.0 7% 18% 3.1x 2.9x 6.6x 5.5x
iomart Group 2.2 2.4 221 218 37.7 8.5 50.4 16.1 60.6 21.7 20% 35% 4.3x 3.6x 13.5x 10.0x
Median 17% 34% 3.7x 3.2x 12.1x 9.0x
Mean 17% 35% 3.7x 3.1x 12.8x 9.2x
Web Hosting
Web.com $18.8 $19.1 $878 $1,575 $120.3 $6.5 $199.2 $17.2 $467.1 $144.7 134% 741% 7.9x 3.4x 91.5x 10.9x
Tucows 1.1 1.7 51 49 84.6 4.5 97.1 5.7 - - 0.5x 8.6x
Median 134% 741% 4.2x 3.4x 50.1x 10.9x
Mean 134% 741% 4.2x 3.4x 50.1x 10.9x
CLECs
Windstream $9.9 $13.4 $5,807 $14,712 $3,710.7 $1,812.2 $4,285.7 $1,886.6 $6,246.7 $2,437.1 46% 29% 3.4x 2.4x 7.8x 6.0x
Frontier 3.9 8.2 3,874 11,810 3,797.7 1,802.9 5,243.0 2,461.6 4,946.7 2,363.5 (6%) (4%) 2.3x 2.4x 4.8x 5.0x
CenturyLink 38.9 41.3 24,141 45,478 7,042.0 3,639.0 15,351.0 6,518.0 18,272.7 7,501.2 19% 15% 3.0x 2.5x 7.0x 6.1x
Cincinnati Bell 3.6 4.2 708 3,362 1,377.0 501.6 1,462.4 522.0 1,483.3 529.0 1% 1% 2.3x 2.3x 6.4x 6.4x
TDS 21.1 32.0 2,289 3,610 4,986.8 1,063.5 5,180.5 1,127.5 5,211.7 1,153.6 1% 2% 0.7x 0.7x 3.2x 3.1x
Median 10% 8% 2.6x 2.4x 6.7x 6.0x
Mean 15% 10% 2.7x 2.4x 6.5x 5.9x
Sources: First Call mean estimates for projections; Capital IQ historical financial and operating data. Price Close 06/20/2012.1) 1 GBP = 1.56 USD `
TEV / Revenue TEV / EBITDA
Trading MultiplesFinancial and Operating Data
CY 2010A CY 2011A CY 2012E Growth '11-'12
Research Projections
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www.redcapgroup.com 6
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Sources: Capital IQ, Venturewire, Redwood Capital
Publicly Traded IT Services Companies (continued)
$ millions
Stock 52 Week Market
Company Name Price High Cap TEV Revenue EBITDA Revenue EBITDA Revenue EBITDA Revenue EBITDA CY 2011A CY 2012E CY 2011A CY 2012E
New Voice Services
cBeyond $6.0 $13.8 $182 $184 $452.0 $59.1 $485.4 $69.3 $489.6 $88.3 1% 27% 0.4x 0.4x 2.7x 2.1x
Vonage 2.0 4.8 444 469 885.0 148.1 870.3 153.4 847.5 123.0 (3%) (20%) 0.5x 0.6x 3.1x 3.8x
8x8 4.3 5.4 306 282 67.8 6.3 79.8 9.0 103.2 14.2 29% 58% 3.5x 2.7x 31.3x 19.9x
Median 1% 27% 0.5x 0.6x 3.1x 3.8x
Mean 9% 22% 1.5x 1.2x 12.3x 8.6x
Distributors
Arrow $35.0 $43.4 $3,916 $5,462 $18,744.7 $861.6 $21,390.3 $1,056.0 $21,173.6 $992.7 (1%) (6%) 0.3x 0.3x 5.2x 5.5x
Ingram Micro 17.6 19.8 2,675 2,024 34,589.0 547.1 36,328.7 521.1 36,723.0 573.1 1% 10% 0.1x 0.1x 3.9x 3.5x
Tech Data 47.9 59.3 1,908 1,580 24,376.0 381.3 26,488.1 413.5 26,102.1 434.6 (1%) 5% 0.1x 0.1x 3.8x 3.6x
Median (1%) 5% 0.1x 0.1x 3.9x 3.6x
Mean (0%) 3% 0.1x 0.1x 4.3x 4.2x
Integrators
BlackBox $27.2 $32.8 $477 $636 $1,054.1 $114.1 $1,086.6 $113.2 $1,087.7 $99.3 0% (12%) 0.6x 0.6x 5.6x 6.4x
Insight Enterprises 15.4 23.1 685 693 4,809.9 165.0 5,287.2 193.0 5,508.5 215.1 4% 11% 0.1x 0.1x 3.6x 3.2x
Median 2% (0%) 0.4x 0.4x 4.6x 4.8x
Mean 2% (0%) 0.4x 0.4x 4.6x 4.8x
Consultants
Cognizant $60.4 $78.0 $18,376 $15,885 $4,592.4 $972.0 $6,121.2 $1,260.6 $7,550.8 $1,537.4 23% 22% 2.6x 2.1x 12.6x 10.3x
Accenture 59.6 65.9 38,403 33,362 22,213.7 3,481.5 26,535.9 4,227.1 28,574.7 4,570.4 8% 8% 1.3x 1.2x 7.9x 7.3x
Wipro 7.1 8.0 17,462 16,245 5,605.5 1,207.0 6,716.1 1,295.2 7,908.5 1,549.0 18% 20% 2.4x 2.1x 12.5x 10.5x
Cap Gemini 36.0 51.7 5,526 5,002 11,351.6 943.7 12,651.6 1,148.6 13,029.1 1,212.3 3% 6% 0.4x 0.4x 4.4x 4.1x
Median 13% 14% 1.8x 1.6x 10.2x 8.8x
Mean 13% 14% 1.7x 1.4x 9.3x 8.1x
Sources: First Call mean estimates for projections; Capital IQ historical financial and operating data. Price Close 06/20/2012.1) 1 GBP = 1.56 USD `
TEV / Revenue TEV / EBITDA
Trading MultiplesFinancial and Operating Data
CY 2010A CY 2011A CY 2012E Growth '11-'12
Research Projections
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www.redcapgroup.com 7
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
While the last two years have certainly been a bit choppy for public equities, IT
services businesses with recurring revenue streams have significantly outperformed
all other sectors. While our universes are small enough that they may be subject to
individual company performance, nevertheless, the adoption of hosted offerings and
the general uptake in data center resources has provided a solid base upon which to
grow. Surprisingly, many other sub-sectors, such as integrators (BlackBox, Insight
Enterprises) and New Voice Services (8x8, cBeyond) have not faired nearly as well.
The slow economic rebound has certainly provided a difficult climate in which to
sell new IT upgrades. Going forward, we think that recurring revenue businesses
should continue to perform extremely well, regardless of the broader markets per-
formance or the economic recovery. These businesses are benefiting from the out-
sourcing of IT and reduction of the overall IT budget that many enterprises are in-
creasingly focused on during challenging economic times.
Regarding private companies, the valuation trends are consistent, with recurring
revenue businesses in the hosting, managed services and cloud infrastructure areas
commanding significant premiums. Also important to note in the private market is
that for the few players of scale, the premium over smaller competitors is quite sig-
nificant. We believe that this is due to the significant scarcity value of private play-
ers of scale relative to the number of larger players looking to make acquisitions.
Sources: Capital IQ, Venturewire, Redwood Capital
Public Stock Trends
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
Jun-
2010
Jul-2
010
Aug-
2010
Sep-
2010
Oct-2
010
Nov
-201
0
Dec
-201
0
Feb-
2011
Mar
-201
1
Apr-20
11
May
-201
1
Jun-
2011
Jul-2
011
Aug-
2011
Sep-
2011
Oct-2
011
Nov
-201
1
Dec
-201
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Jan-
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Feb-
2012
Mar
-201
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2012
Data Center Managed Hosting Web Hosting CLECs New Voice Services Distributors Integrators Consultants
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www.redcapgroup.com 8
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
The hosting area has been one of the most active sectors from an M&A standpoint.
While the capital and scale requirements make the data center and telecom markets
less viable for start-ups, hosting is a much easier and less capital intensive space in
which to launch a new business. Not surprisingly, the list of small hosting start-ups
is lengthy and the recent consolidation activity rather high.
Hosting Players to Remain Focused On Hosting: Our expectation for M&A
among the larger managed hosting players is that they will remain highly focused
on acquiring smaller players within their space, either to acquire customer bases or
for specialized technologies. We dont expect to see hosting companies acquiring
data center players, integrators, or even managed service providers. We believe
that managing hosting providers will entirely focus their acquisitions on acquiring
either smaller hosting players or on niche technology acquisitions to improve the
platforms they use to offer solutions or allow customers and channel partners to
manage and deploy their offerings.
J2 Highly Acquisitive: One highly active player is J2 Global which has completed
over dozen acquisitions during the past several years to expand its offerings of
communications and collaboration solutions. J2 focused on smaller acquisitions to
acquire customer bases that it can migrate to its platforms, or to add niche technolo-
gies. They have successfully expanded into seven key product areas and are likely
considering other spaces as well as geographic expansion as they look to increase
they presence in Europe and Asia.
Private Equity To Remain Very Active In Hosting: Private equity buyers have
also been active in the hosting area to secure platforms for growth, perhaps most
significant was Silver Lakes acquisition of GoDaddy. Other private equity deals
include Microsoft Exchange hosting player Intermedia which was acquired by Oak
Hill. In all cases, we believe these deals are simply platform acquisitions which
the financial owners intend to build up through complementary acquisitions. For
example, in parallel with its acquisition of Intermedia, a hosted MSFT exchange
player, buyout group Oak Hill also acquired Zlago to help enhance their cloud ser-
vice capabilities. Oak Hill also brought in previous Savvis CEO Phil Koen, with
the intention of using Intermedia as a platform for expansion. We expect these new
private equity backed managed hosting companies to become more aggressive in
M&A to expand their offerings.
Selected M&A 2009 - Present
ACQUISITION ACTIVITY BY HOSTING PROVIDERS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
12/16/2010 Cloudkick Rackspace - Cloud IT Online platform for cloud server management
04/27/2011 Switch Media iomart Group 2.1 1.0x 15.7x Consultants Digital, creative and marketing, and technical services
02/16/2012 Young CS Technologies Rackspace - Consultants SharePoint consulting services
06/17/2010 Register.com Web.com 135.1 Distributors Domain name registration, domain name transfer, domain
name renewal
10/10/2011 NeoSpire Hosting.com - Hosting Multi-platform server management, dedicated server
hosting; application hosting
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Selected M&A 2009 - Present
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
06/14/2011 Zlago Intermedia.net - Hosting Hosted desktop, hosted exchange, hosted PBX/VOIP,
software on demand, etc
01/03/2012 Voxel dot Net Internap Network 33.3 Hosting Hosting solutions, cloud computing services, hosting
infrastructure
11/24/2011 EQSN iomart Group 3.8 Hosting Commercial IT hosting solutions to companies
11/01/2010 Titan Internet iomart Group 7.6 Hosting Webhosting services for data centers in the United Kingdom
10/26/2011 C3 Computers Limited,
Online Backup Business
j2 Global - Hosting Virtual dedicated server hosting and secure online backup
services
02/01/2010 Comodo Communications j2 Global 5.9 Hosting Trust and assurance services for the Internet
07/11/2011 DataHaven j2 Global - Hosting Online backup technology solutions for small, medium, and
large businesses
05/05/2010 FuseMail j2 Global 6.6 Hosting Outsourced email hosting services to businesses and
resellers
10/21/2010 keepITsafe Data Solutions j2 Global - Hosting Online backup services
02/06/2012 Landslide Technologies j2 Global - Hosting CRM solution includes contact and account management,
opportunity management, collaboration
04/01/2010 mBox j2 Global - Hosting Strategic marketing, branding, and media agency
01/23/2012 Offsite Backup Solutions j2 Global - Hosting Online backup services for small businesses.
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Selected M&A 2009 - Present
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
09/08/2010 Venali j2 Global 17.0 1.7x Hosting Internet fax services to various corporations.
02/10/2011 Anso Labs Rackspace - Hosting Software and services for private cloud computing
infrastructure
08/02/2011 EPAG Domainservices Tucows 2.1 Hosting Domain registration services for resellers and corporate
clients
03/02/2010 Innuity, Inc., Web Hosting
Business
Web.com 1.4 Hosting Design, acquisition, and integration of applications to
deliver solutions for small business
08/03/2011 Network Solutions Web.com 793.7 8.8x Hosting Web-related services, including domain name registration
services, Web site hosting, Web site design, e-mail, SSL
certificates07/11/2011 Buzz Networks Limited,
Virtual PBX Business
j2 Global - New Voice
Services
Telemarketing services, such as call recording,
intelligent/call routing, and numbering services
07/26/2010 Alban Telecom j2 Global 2.8 Telecom Non-geographic numbers mobiles and accessories, call
plans, and outbound call select services
02/01/2010 Realty Telecom j2 Global - Telecom Realty Telecom Ltd. offers telecommunication services
02/16/2012 Zimo Communications j2 Global - Telecom Non-geographic numbers and online call management tools
03/01/2012 Zintel Communications j2 Global 12.9 Telecom Provides telecommunication services and solutions for
businesses
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESHOSTING
Weve profiled two deals below that we think are interesting moves indicative of
what we can expect to see from the larger managed hosting players in the future.
First is the acquisition of SharePoint911 by Rackspace which focused on Share-
Point managed infrastructure. Second is the expansion by J2 into the CRM space
with its acquisition of Landslide Technologies. In both cases, these larger players
bought relatively small, solution specific players in an effort to expand their offer-
ings into new markets.
Young CS Technologies / Rackspace Hosting:
Target: Young CS Technologies-SharePoint911
Acquirer: Rackspace Hosting
Date: February 2012
Description: "For several years, Rackspace has focused on
providing managed SharePoint infrastructure," says John
Engates, chief technology officer at Rackspace. "We are
thrilled to have the world-class expertise of SharePoint911
on our team to give us greater application delivery service
capabilities. SharePoint911 will add the talent and expertise
to our teams to make SharePoint deployments easier for our
customers while increasing their scalability and perfor-
mance through better integration of the workload and infra-
structure."
Source: Rackspace press release, Rackspace Acquires Share-
Point911, Feb 16, 2012.
Landslide Technologies / j2 Global:
Target: Landslide Technologies
Acquirer: j2 Global
Date: February 2012
Description: "The Landslide acquisition reflects continued
execution of our plan to expand our array of cloud-based ser-
vices for business," said Hemi Zucker, CEO of j2 Global.
"Landslide brings us a proven CRM platform for small to mid-
sized businesses and an established customer base. It also pro-
vides us an additional value-added service to sell through our
existing sales channels and into our existing base of more than
2 million paid cloud service subscribers."
Source: j2 Global press release, j2 Global Acquires Cloud-Based
CRM Provider.
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www.redcapgroup.com 12
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
The data center space has continued to see the consolidation trend play out with
larger players continuing to expand their core businesses along with the move by
telecom providers to make major acquisitions in the space. There has also been
some continued activity by private equity players, although this has slowed as the
market is maturing and many private equity players tend to be more in the exiting
than acquiring phase.
Telecom Players Moving In: Perhaps in the final phase of the consolidation, tele-
com players have acquired data center players themselves, most notably Centu-
ryLinks $3.1 billion acquisition of Savvis and Verizons $1.9 billion acquisition of
Terremark. Eventually we expect that a significant share the data center market
will be owned by telecom providers and expect to see other large transactions in the
near futre.
A Look to Higher Margin Offerings: While most data center players have so far
remained focused on consolidating within the data center space and tried to capture
the significant organic growth opportunities, as the market matures we expect to see
larger data center players move further in to managed hosting and cloud infrastruc-
ture areas. Currently, there are numerous start-ups leveraging proprietary IP to
offer new IaaS services including dedicated and metered server capacity, cloud
computing, and even hosted desktop and webtop solutions. These, along with man-
aged hosting of certain enterprise applications, may serve as complementary, higher
margin solutions that could allow data center players to continue to growth their
businesses and take a greater wallet share of customer IT needs.
Selected M&A 2009 - Present
ACQUISITIONS BY DATA CENTER PROVIDERS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
02/14/2011 Alog Equinix 127.0 Data Center Collocation (Carrier Nuetral) / Managed Hosting, expansion
into South America
08/02/2010 Internet Facilitators
Limited
Telecity Group 33.5 Data Center Colocation (Carrier-neutral), bolstering NW England
presence
09/23/2011 The UK Grid Network Telecity Group 18.1 6.5x 8.0x Data CenterColocation (Carrier-neutral), consolidating England market
08/08/2011 Data Electronics Group
Limited
Telecity Group 143.3 6.7x 13.9x DistributorsCollocation (carrier nuetral), expansion into Ireland
06/01/2020 FusePoint Savvis 124.0 10.4x Hosting Managed Hosting / Colocation, expansion into Canada
(financial services)
11/01/2011 Perimeter Technology
Center
Colo4 - Hosting Co-location and managed hosting services; monitored and
managed services, etc
06/01/2010 SAVVIS Canada Savvis 169.4 3.6x 15.4x Managed
Services
Application and infrastructure managed solutions for
mission critical enterprises
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www.redcapgroup.com 13
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESDATA CENTER
Profiled below are two deals that reflect a few key trends indicative of the M&A
activity being led by data center players. First is a geographic expansion by
Equinix with its acquisition of Alog in the South American market. In fact, many
of the deals by Equinix and Telicity recently have been expansions into new inter-
national markets.
The second deal is Savviss acquisition of Fusepoint, also a geographic expansion
as well as a further building of Savvis hosting business, (which as noted in the
quote below) was specifically made to move into Canada, in part at the request of
Savvis customers.
Alog / Equinix:
Target: Alog
Acquirer: Equinix
Date: February 2012
Description: The investment extends Platform Equinix(TM)
to the South America market, creating a footprint of 95 data
centers across 37 global markets. It also gives Equinix the
ability to satisfy strong demand from its network, content,
cloud and financial services customers looking to establish a
presence in the rapidly growing Brazilian market, the world's
seventh largest economy and the second largest IT market in
emerging markets behind China.
Source: Equinix press release, Equinix completes the acquisition
of Alog, April 26, 2011.
Fusepoint / Savvis
Target: Fusepoint
Acquirer: Savvis
Date: June 2010
Description: "The acquisition of Fusepoint is a step toward one
of our most important goals to expand our geographic presence
around the world," said Jim Ousley, Savvis chairman and chief
executive officer. "Our largest customers have been asking us to
expand into Canada, and the acquisition of Fusepoint allows us
to do so in a seamless and efficient manner. Our best-in-class
product set and strong vertical market focus meshes well with
Fusepoint's fast growth and deep penetration of Canadian enter-
prises. Fusepoint has a great track record and extends Savvis'
reach into the highly promising Canadian hosting market includ-
ing Toronto, the financial center of Canada."
Source: SAVVIS press release, Savvis to Acquire Canadian-Based
Fusepoint, June 1, 2010.
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www.redcapgroup.com 14
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Telecom Players Likely to Acquire Most Broadly In IT Services: Telecom
players have probably been the most active group of acquirers, using M&A to move
into a variety of new areas. TDS moved into managed services with its acquisition
of OneNeck. Verizon and CenturyLink moved into the data center space and man-
aged hosting areas with acquisitions of Terremark and Savvis, and Windstream
moved into the hosting area with its acquisition of Hosted Solutions. Going for-
ward, we expect to see much more of all of the above.
Acquisitions Into New Services Likely to Be Pursued By Large and Small Ser-
vices Providers Alike: Going forward we expect to see telecom players across the
board, from large ILECs to smaller CLECS and RLECs expand their service offer-
ings with acquisitions of data center and hosting providers, and managed services
businesses. Since telecom providers offer connectivity services and have large field
service work forces with the ability to go on-premise as needed, they are extremely
well suited to offer a wide range of cloud services, including managed services and
managed hosting which can at times require on premise support.
New Services Exacerbate Economy of Scale Advantages: While, telecom play-
ers will continue to consolidate among themselves, as they also expand into new
offerings such as data center and managed services, the increasingly greater
economy of scale advantages that they achieve will only exacerbate the pressure
on smaller, regional players and CLECs to partner up. Perhaps most aggressive in
this regard has been Windstream which has acquired numerous companies over the
past few years, the most significant of which was PAETEC for $2.4 billion in 2001.
PAETEC itself had expanded broadly, acquiring a telephony integrator (Xeta) and
other service providers including McCloud and Cavalier.
Selected M&A 2009 - Present
ACQUISTIONS BY TELECOM PROVIDERS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
04/18/2012 Knology WOW! Internet 1,574.9 3.0x 8.8x Telecom Video, voice, data, and communications services to
residential, business customers
03/21/2012 Arialink Broadband Zayo 18.0 Data Center Internet access solutions, like DSL, T1, direct-to-business
fiber optic Internet solutions
02/06/2012 SureWest Consolidated
Communications
564.6 2.3x 6.6x Telecom Data, video, and voice services to residential and business
customers
08/01/2011 PAETEC Windstream 2,356.5 1.3x 7.5x Telecom Integrated broadband communications services to business
06/28/2011 OneNeck TDS 95.0 2.6x Managed
Services
Hosted application management, enterprise hosting,
infrastructure,
04/27/2011 Savvis CenturyLink 2,500.0 2.6x 10.9x Data Center Colocation / Managed Hosting, managed services growth
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www.redcapgroup.com 15
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Selected M&A 2009 - Present
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
02/01/2011 NaviSite Time Warner Cable 345.0 2.6x 13.0x Hosting Colocation (carrier-neutral), managed services offering for
SMBs
01/27/2011 Terremark Verizon 1,400.0 4.1x 17.1x Data Center Colocation / Managed Hosting, to accelerate everything-as-
a-service strategy
11/04/2010 Hosted Solutions Windstream 310.0 6.0x Hosting Infrastructure as a service solutions to companies and
enterprises
08/17/2010 Q-Comm Corporation Windstream 779.5 Telecom Telecommunications services to residential and business
customers
04/22/2010 Qwest Communications CenturyLink 24,002.7 2.0x 5.6x Telecom Communications services to residential, business,
governmental, etc
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www.redcapgroup.com 16
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESTELECOM
Below are profiles to two telecom acquisitions that reflect the move by telecom
providers into the managed services space. This is a market extremely well suited
to telecom providers as it involves supporting much of the IT the connects through
the service providers network. In addition, managed services allows telecom pro-
viders to leverage many other parts of their organizations, from the field service
technicians when an on-site visit is required, to the centralized back office support
and network operations centers.
OneNeck / TDS:
Target: OneNeck
Acquirer: TDS
Date: June 2011
Description: Our strategy is to have a robust suite of offer-
ings, including colocation, managed services, hosting, cloud,
and solutions delivery, states William Megan, president of
TDS HMS and executive vice president at TDS Telecommu-
nications Corp. in a press release. OneNeck brings sophisti-
cated hosted application management and managed hosting
to our product portfolio that will enable us to leverage the
data center assets recently acquired with VISI and TEAM.
Source: TDS press release, Telephone and Data Systems to Ac-
quire OneNeck IT Services Corporation, June 28, 2011.
NaviSite / Time Warner Cable
Target: NaviSite
Acquirer: Time Warner Cable
Date: February 2011
Description: The acquisition provides Time Warner Cable
Business Class, Time Warner Cables commercial services
business, an immediate presence in the managed services mar-
ket with NaviSites more than 1,200 customers. Following the
completion of the acquisition, Time Warner Cable plans to
continue the exceptional service of NaviSites Enterprise cus-
tomers and to use NaviSites operational expertise and enter-
prise-class infrastructure to meet the rapidly growing demand
for managed services offerings from Time Warner Cables
existing and future small and medium-sized business custom-
ers.
Source: TWC press release, Time Warner Cable to acquire NaviS-
ite, Inc., February 1, 2011.
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www.redcapgroup.com 17
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
The systems integration space is probably the broadest in terms of number of play-
ers and types of offerings. The thousands of small VARs, integrators, IT consult-
ants and other players tend to focus rather narrowly, such as telephony, data, or
storage, and often specialize by a certain equipment vendor. They also tend to be
geographically focused. As a result, the fragmentation is this area is high and con-
solidate activity is a constant.
Expanding Into Managed Services: Historically, much of the M&A activity by
systems integrators has involved consolidation within the sector, with integrator
acquiring integrator. However, going forward we expect to see some of the larger
players accelerate their move into managed services through acquisition. While
most integrators are introducing managed services offerings (which for many is
basically a new pricing model of what they have already been doing), many integra-
tors are finding the transition to be quite difficult. As a result, we expect to see
integrations make acquisitions of managed service providers in an effort to seed
their internal efforts and bring in the skill sets needed to roll out managed service
offerings across their customer base.
Building Nationwide, Diversified Players: Further driving consolidation, as large
players have begun to develop focused on SMB customers, a top tier of national,
diversified players has emerged including BlackBox, Presidio, and Insight Enter-
prises. These and other large players will likely continue fill out their businesses by
acquiring in areas where they may be week (such as virtualization and cloud infra-
structure) or in geographies in which the lack presence. In either case, because
customers tend to choose an IT partner and stick with them, acquisition of custom-
ers through acquisition of their integrators is a common strategy for growth.
Few Large Deals: As shown in the data below, most deals, even by the larger
players tend to be small in size. Presidios acquisition of INX for $155m in No-
vember 2011 represents one of the larger deals in the space. This will likely also
continue to be the case given just how many players there, are how few have valua-
tions north of a few hundred million.
Selected M&A 2009 - Present
ACQUISITIONS BY SYSTEMS INTEGRATORS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
02/28/2012 Total Convergence
Solutions
Presidio - Integrator Life cycle services in unified communications, collaboration
and video, etc
01/31/2012 InnerWireless Black Box - Integrator In-building converged wireless solutions
01/10/2012 E Solutions Corporation Knology 13.8 Telecom Rack space, cage space, virtual private servers, service
systems management
01/09/2012 VantiCore eplus Technology 2.5 Managed
Services
Core unified communications support; network server and
infrastructure support
12/19/2011 AFCOM iNET Interactive - Integrator Supports the educational and business development needs
of data center management, executives, and vendors
worldwide11/01/2011 INX Presidio 155.2 0.4x 51.4x Integrator Network routing and switching, wireless networking, WAN
optimization etc
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www.redcapgroup.com 18
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Selected M&A 2009 - Present
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
10/03/2011 Midwave Datalink 22.4 0.3x 7.7x Integrator IT advisory services and infrastructure services for medium-
large size companies
09/19/2011 Ensynch Insight Enterprises - Integrator Information technology consulting, project and portfolio
management consulting
07/26/2011 PS Technologies Black Box - Integrator Video conferencing equipment
07/25/2011 Paradigm Holdings CACI International 61.5 1.4x 20.8x Integrator Cybersecurity, enterprise, and mission critical
infrastructure support
07/01/2011 Netarx Logicalis 34.0 0.6x Integrator IP telephony, unified messaging, IM/presence, unified
contact center, etc
06/30/2011 OpSource Dimension Data
Holdings
- Hosting Cloud and managed hosting solutions for enterprises,
service provider, and SaaS
06/20/2011 Tushaus Computer Services Dedicated
Computing
- Integrator Business process improvement, application development
and integration, etc
04/11/2011 CareCentric, Inc.,
Managed Hosting Services
Prime Care
Technologies
- Hosting IT managed hosting services and assets
01/04/2011 ProSys Information
Systems
Applied Computer
Solutions
10.5 0.0x Integrator Data management, infrastructure management, systems
architecture etc
10/25/2010 LOGOS Communications Black Box 12.8 1.0x Integrator Voice, video, security, storage, and wireless technologies
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www.redcapgroup.com 19
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESSYSTEMS INTEGRATION
Shown below are two profiles of acquisitions by large integrators. The acquisition
of INX by Presidio allows the company to both broaden its solution set as well as
expand its geographic presence in the US. The acquisition of OpSource by Dimen-
sion Data brings the ability to offer cloud services to a large global solutions inte-
grator. We expect to see many more deals like OpSource as larger players find the
need to offer a cloud alternative for customers.
INX / Presidio:
Target: INX
Acquirer: Presidio
Date: November 2011
Description: We are excited to complete the acquisition of
INX and begin moving forward as one unified company.
Bringing these two outstanding companies together enables
us to broaden our portfolio of services and solutions and to
significantly expand our footprint across the U.S., com-
mented Kevin Penn, Presidios Chairman and a managing
director of American Securities. We are in a great position
to build on our industry leadership position and look for-
ward to a successful 2012.
As a result of the acquisition, Presidio now employs more
than 1,800 IT professionals operating out of over 45 offices
across the United States.
Source: Presidio press release, Presidio Completes Acquisition
of INX, Inc., December 30, 2011.
OpSource / Dimension Data Holdings
Target: OpSource
Acquirer: Dimension Data Holdings
Date: June 2011
Description: OpSource brings a rich set of services, a sound
cloud architecture, and extensive experience in cloud services
that will meet immediate client needs - in addition to a cloud
infrastructure which supports development and growth in this
space. We believe OpSource provides us with an accelerated
time-to-market as their infrastructure and services are well-
established and tested. Dimension Data is now well-
positioned to provide our clients with services that help them
at each step in their journey toward cloud architectures, said
Brett Dawson, Dimension Data CEO.
Source: OpSource press release, Dimension Data Acquires Op-
Source to Accelerate Cloud Strategy, June 30, 2011.
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www.redcapgroup.com 20
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Very Few Players of Scale: Hosted Voice Services players offer telephony related
applications such as hosted PBX, contact center and unified communications. The
players in this space tend to be rather small with some of the larger players being
companies like 8x8 and Cbeyond. Acquisition activity by these players has been
limited and focused around consolidating much smaller players, adding technology
capabilities or related applications, such as 8x8s acquisition of Contactual.
Beyond Small Add-ons, Hosted Voice Players are More Likely Targets Than
Acquirers: Going forward we expect that the larger voice services players will
likely be acquired themselves by telecom players or potentially larger players in the
hosting space that want to offer unified communications as part of their solution
sets for SMBs. In fact, many players like GoDaddy, Intermedia, and others offer
hosted PBX offerings. As the adoption of hosted PBX and contact center continues
to accelerate and as mid-size business begin to take up this service, we expect larg-
er player finally take notice.
There have already been a few acquisitions to date by players outside the space
including Shortels acquisition of M5 Networks. With many more deals like this,
new voice services will be less of a stand-alone space and more of another line of
business for telecom, hosting and telephony equipment vendors.
Selected M&A 2009 - Present
ACQUISTIONS BY HOSTED VOICE SERVICES PROVIDERS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
02/23/2012 Creative Interconnect
Communications
Utility Telephone - New Voice
Services
Phone serviceshosted solutions with phones, routers, and
dashboards
02/01/2012 M5 Networks ShoreTel 159.8 New Voice
Services
Hosted and managed phone systems
12/27/2011 Consolidated
Technologies, Inc., Hosted
VoIP Division
Stage 2 Networks - New Voice
Services
Hosted voice and data services
09/12/2011 Contactual 8x8 27.7 3.1x -38.2x New Voice
Services
Cloud-based call center and customer interaction
management solutions
07/14/2011 Alteva USA Datanet 17.9 3.0x New Voice
Services
Unified communications and enterprise hosted VoIP
communication solutions
06/20/2011 Zerigo 8x8 2.0 Hosting Virtual private server/cloud server, managed DNS hosting,
and server monitoring services
11/03/2010 Aretta Communications Cbeyond 4.1 New Voice
Services
Hosted communication solutions for SMBs
05/06/2010 Central Host 8x8 1.6 1.6x Data Center Co-location/data center facilities that provide private
cloud, dedicated server hosting
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www.redcapgroup.com 21
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESHOSTED VOICE SERVICES
Below are a few deals by players in the voice technology and voice services areas.
ShoreTels acquisition of M5 we think may be somewhat of an inflection point
deal, indicating that even the legacy PBX providers are seeing a competitive threat
and or a need to have a hosted alternate. The 8x8 acquisition of Contactual is the
latest move by 8x8 in its efforts to be the leading provider of cloud communications
solutions.
M5 Networks / ShoreTel:
Target: M5 Networks
Acquirer: ShoreTel
Date: February 2012
Description: The acquisition of M5 positions ShoreTel as a
leader in the fast-growing cloud UC market and delivers a
suite of hosted telephony solutions that is unmatched in the
marketplace, ShoreTel CEO Peter Blackmore said in a state-
ment. This acquisition is a critical step in our evolution and
enables the company to capitalize on trends in cloud compu-
ting and advance our enterprise communications strategy.
Source: ShoreTel press release, ShoreTel Acquires Hosted Unified
Communications Pioneer M5 Networks, February 1, 2012.
Contactual /8x8
Target: Contactual
Acquirer: 8x8
Date: September 2011
Description: The acquisition of Contactual significantly
broadens 8x8's technological expertise and service offerings
in the hosted SaaS (Software as a Service) call center mar-
ket and brings in house the only major software technology
of 8x8's service offerings that was not owned and devel-
oped by 8x8. 8x8 has been reselling the Contactual contact
center technology since 2007. This strategic investment is
one of several recent initiatives implemented by 8x8 to ad-
vance its mission of becoming the industry's premier pro-
vider of broad-based cloud communications and IaaS
(Infrastructure as a Service) solutions.
Source: 8x8 press release, 8x8 Completes Acquisition of Contac-
tual, Inc., September 16, 2011.
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www.redcapgroup.com 22
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
The consolidation at the very largest levels of the IT industry, that led Dell and HP
to make large IT services acquisitions to better compete with IBM and its Global
Services division, has begun to play out in the SMB market as well.
Best Buy: Best Buy has been building its services business through the Geeksquad,
for some time, but its recent acquisition of Mindshift for $167m clearly moved the
company into the SMB market.
Konica: Another notable deal in this area is copier maker Konicas acquisition of
managed services player All-Covered. With its numerous copier locations around
the country, Konica believes that it can leverage its position in the print space to
expand into other areas of IT management for SMBs.
Dell: Dell was been very active in building its SMB services businesses. Several
years ago, the company acquired managed services player Everdream and has since
completed other acquisitions and made significant internal investments as it builds
out its services offerings for SMBs.
Going forward, we expect to see most large IT players that sell core equipment
such as servers, desktops, copiers and related equipment to build out their solutions
groups. As with the distributor space, as product resale becomes more difficult to
make money, players will need to move to higher margin areasand for the next
few years, thats going to be services. More importantly however, as SMBs rely
increasingly on their solution provider or MSP to handle all their IT needs, the pur-
chase decision for equipment (and many other parts of the IT infrastructure) will
shift to solution providers as customers simply wont care. Wouldnt HP and Dell
love to be able to decide where small businesses should by their technology?
Selected M&A 2009 - Present
IT SERVICES ACQUISTIONS BY LARGE IT HARDWARE PLAYERS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
02/24/2012 AppAssure Dell -
Hosting
Backup and replication software
11/07/2011 mindSHIFT Best Buy 167.0 Managed
Services
Infrastructure and software services for SMB
05/24/2011 Printelligent HP - Managed
Services
Managed document solutions
03/01/2011 Concept Group Xerox 43.0 Managed
Services
Digital document solutions
01/31/2011 WaterWare Xerox - Integrator Consulting and web-hosting
01/06/2011 All Covered Konica - Managed
Services
Desktop, server, other IT management
12/22/2010 InSiteOne Dell - Storage Enterprise data archiving, storage, etc
01/20/2010 Irish Business Systems Xerox 31.0 Managed
Services
Managed print services
09/21/2009 Perot Systems Dell 4,101.3 1.6x 14.8x Consulting Application modernization, business intelligence, etc.
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www.redcapgroup.com 23
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESLARGE IT HARDWARE
Below are a few deal profiles that reflect the major trend by large equipment pro-
viders, both manufacturers and distributors, of moving into managed services. Giv-
en that the managed services space is still highly fragmented, we expect that each
of the acquirers below will likely continue to acquirer in these areas to build a na-
tionwide foot print.
mindSHIFT Technologies / Best Buy:
Target: mindSHIFT Technologies
Acquirer: Best Buy
Date: November 2011
Description: The transaction will accelerate
Best Buy's growth in the small and mid-sized
business IT services category, the company
said. It estimates the small and mid-sized man-
aged services provider market is worth $40 bil-
lion.
mindSHIFT provides cloud service, data center
services and professional services to more than
5,400 US clients.
Best Buy said the combination of mindSHIFT's
capabilities with its own points of distribution
through its retail, Geek Squad services and Best
Buy for Business operations will create a com-
petitive advantage.
Source: Forbes, BestBuy buys into Cloud with
MindSHIFT, November 7, 2011.
Printelligent / Hewlett-Packard:
Target: Printelligent
Acquirer: Hewlett-Packard
Date: May 2011
Description: As a market leader in Managed
Print Services, this acquisition puts us even fur-
ther ahead by strengthening our ability to deliver
services and solutions through our channel part-
ners to SMB customers, said Vyomesh Joshi,
executive vice president, Imaging and Printing
Group, HP. Were reinforcing our commitment
to our channel partners by bringing them a level
of technology and experience that is unprece-
dented in the industry.
With HPs strength, this offering will continue
to grow, and channel partners will deliver an
unparalleled solution to help customers better
manage their print environments, said Rob
Wellman, chief executive officer, Printelligent.
Source: HP press release, HP Bolsters Managed
Print Services Offering..., May 24, 2011
All Covered / Konica
Target: All Covered
Acquirer: Konica
Date: January 2011
Description: "Konica Minolta's acquisition of All
Covered will further enhance our ability to deliver
sophisticated solutions to our customer base and
accelerate the expansion of our IT services busi-
ness," said Rick Taylor, Senior Executive Vice
President and Chief Operating Officer, Konica Mi-
nolta Business Solutions U.S.A., Inc. "By integrat-
ing the scalable business model of All Covered
with our extensive sales and service footprint, we
intend to deliver unmatched value to our end users
and channel partners."
Source: All Covered press release, Konica Minolta
Acquires All Covered, Inc., January 6, 2011.
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www.redcapgroup.com 24
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
For years, private equity firms have studied the IT services space for SMBs and
wondered how to take advantage of the highly fragmented nature of the market.
The opportunity of consolidating small, niche players to form a nationwide compa-
ny with a broad solution set has been a very tempting proposition for financial play-
ers. However, success has been rather elusive as many efforts in the space have
failed over the years.
Cloud Based Businesses Provide Better Model of Consolidation Plays: The
recent shift to managed services and SaaS models has provided a new strategy and
much better model for consolidating smaller players. As SMB customers become
much more closely tied to their solution provider under recurring services contracts,
and as the shift to the cloud puts more control in the hands of the solutions provider
(as opposed to the product vendor), we believe that build-up strategies by private
equity groups that selectively use M&A have a much greater chance of succeeding
than in the past.
Not surprisingly, private equity groups have been much more active in this space.
Just over the past 2 years, a number of notable transactions have occurred that high-
light the move by rather large, sophisticated private equity players to take another
shot at creating national players to serve the IT services needs of the SMB market.
Selected M&A 2009 - Present
IT SERVICES ACQUISTIONS BY PRIVATE EQUITY FIRMS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
10/13/2011 Xand Corporation ABRY 49.0 Data Center Data center infrastructure, co-location, private cloud, and
business continuity services
10/13/2011 CoSentry.net TA Associates - Data Center Colocation (carrier neutral)
10/10/2011 SPS CourtSquare Integrator Design, installation, and support of voice solutions, data
networking, and converged applications
09/12/2011 Bravura Networks Technology Capital
Investors
- Managed
Services
Managed services offering BIT Support that include
managed IT support services
08/08/2011 TelX ABRY + Berkshire Data Center Colocation (carrier-neutral)
08/08/2011 Plimus Great Hill Partners 115.0 Integrator E-business platform for marketing, selling, and distributing
digital goods
06/30/2011 Go Daddy SilverLake + 2,250.0 Hosting Hosting solutions, Web site creation tools, secure SSL
certificates
05/23/2011 Intermedia Oak Hill Integrator Online business communications services
09/25/2009 Pomeroy Platinum Equity 81.7 Managed
Services
Enterprise, network, and end-user technologies
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www.redcapgroup.com 25
REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESPRIVATE EQUITY
While both the capital raising and M&A sections of this report provide a much
longer list of investments and acquisitions in the sector by the financial community,
below are few notable transactions that we think are important to review as they
highlight some of the key trends discussed through our report.
Intermedia / Oak Hill Capital:
Target:: Intermedia
Acquirer: Oak Hill Capital Partners
Date: May 2011
Description: Intermedia is the largest inde-
pendent provider of managed hosting for Mi-
crosoft Exchange. Oak Hill has significant ex-
perience in the data center space (having done
both Telecity Redbus and ViaWest). As evi-
dence that they have big expectations for Inter-
media, Oak Hill installed former Savvis head
Phil Coen as CEO. While Intermedia and Oak
Hill are likely still working through the strategy,
we expect it will include at least one or more
acquisitions to broaden the solution set and
transform Intermedia into a broad Master MSP.
Source: Intermedia.net press release, Oak Hill Cap-
ital Partners to Acquire, May 26, 2011
Pomeroy / Platinum Equity
Target: Pomeroy IT Solutions
Acquirer: Platinum Equity
Date: September 2009
Description: "In spite of the downturn in the
economy, the Company has improved profitabil-
ity and grown its business in 2009," said Christo-
pher C. Froman, the Company's CEO. "We
know the IT products and services business very
well and have had great success creating value in
this space," said Jacob Kotzubei, partner at Plati-
num that is leading the investment. "Pomeroy has
a compelling product and service offering, strong
customer and vendor relationships, and excep-
tionally talented employees. We believe the man-
agement team has done an excellent job navi-
gating the economic downturn and we look for-
ward to supporting their growth using our full
complement of mergers, acquisitions and opera-
tions capabilities."
Source: Platinum Equity press release, Pomeroy IT
Solutions, Inc. Announces, September 25, 2009
SPS / Court Square:
Target: Strategic Products & Services
Acquirer: Court Square Partners
Date: 2011
Description: Court Square Partners has ac-
quired Strategic Products and Services, a leading
integrator of Avaya telephony solutions including
PBXs, call centers and a wide range of other
telephony and data solutions. This transaction is
one of several recently in the Avaya channel
others including Genstars acquisition of Conver-
geOne and PAETECs acquisition of Tulsa based
Avaya dealer Xeta Technologies.
Source: CapitalIQ, June 29, 2012
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
As shown in the detail below, distributors have generally stayed focused on acquir-
ing other players at the distributor level. While there have been a few attempts by
distributors to move downstream through acquisitions of systems integrators
(CDW / Berbee, Arrow / Shared Technologies), these deals have tended to be the
exception and pose channel conflict challenges as they potentially place the distrib-
utor in competition with their customers.
Hosted Applications as a Distribution Opportunity: One area where we expect
to see acquisitions by distributors is in the hosted applications area involving play-
ers offering hosted applications through an indirect channel. Currently, many
MSPs and integrators fill out their solution needs for customers through reseller
relationships with a variety of hosting providers such as Intermedia (for MSFT ex-
change), Mozy / EMC (for online backup), Global Relay (archiving & compliance),
GoDaddy (web hosting) or a long list of other players. We think these hosted offer-
ings present excellent expansion opportunities for distributors who have expensive
networks of channel partners through which to push these offerings.
In addition, many of these applications can benefit from integration on the back-end
and there are already a few players such as Verecloud and ThinkGrid that are devel-
oping carrier-grade platforms (similar to Jamcracker) that can provide a wide range
of applications, provisioned by MSPs through a platform that can provide integrat-
ed billing, authentication and a variety of other functions and do it in an integrated
fashion across multiple offerings. We think this presents an excellent opportunity
for distributors and would not be surprised to see some acquisitions by distributors
into this space.
Beyond that, we expect that distributors will generally stay focused on acquiring
within their own space, bolting on other distributors with niche expertise in certain
technologies and components or within certain market verticals.
Selected M&A 2009 - Present
ACQUISITIONS BY DISTRIBUTORS
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
11/20/2010 Intechra Group Arrow Electronics 101.1 1.3x Consultants Information technology asset disposition, value recovery,
etc
01/18/2012 TechTurn Arrow Electronics - Consultants Llifecycle management, asset recovery, technology
management
04/03/2012 Altimate Group Arrow Electronics 64.1 0.1x Distributors Distribution of enterprise information technology solutions
08/08/2011 Chip One Stop Arrow Electronics 90.7 2.0x 14.4x Distributors Online distributor of electronic components in Japan
12/06/2010 DIASA Informtica Arrow Electronics 132.8 0.4x Distributors Distributes technology hardware and software
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Selected M&A 2009 - Present
Transaction
Date Target Buyer
Transaction
Value
Rev
Mult.
EBITDA
Mult.
Target
Space Business Description
09/20/2010 Nu Horizons Electronics Arrow Electronics 168.2 0.2x 11.6x Distributors Distributes advanced technology semiconductor, and telco
solutions
04/06/2010 PCG Trading Arrow Electronics 138.4 0.5x Distributors Technology supply chain company
10/01/2010 Richardson RFPD Arrow Electronics 211.8 0.6x Distributors Distribution services for RF and wireless infrastructure
communications networks
06/27/2011 Seed International Ltd.,
Distribution Business
Arrow Electronics - Distributors Distributes electronic equipments, which includes digital
signal processor (DSP) and field-programmable gate array
(FPGA)04/06/2010 Verical Arrow Electronics - Distributors B2b marketplace for the high-tech manufacturing industry
07/06/2010 Asiasoft Hong Kong Ingram Micro - Distributors IT solutions for service providers, system integrators,
resellers
09/14/2010 InterAct Ingram Micro - Distributors Distributes data center solutions
07/14/2010 D.L.I.-Distribuio E
Logstica Para A
Informtica
Tech Data Corp - Distributors Distributor of information technology products.
09/12/2011 Mensch & Maschine
Distribution business
Tech Data Corp 34.1 Distributors CAD/CAM solutions for mechanical and electrical
engineering
12/19/2011 ProDesk Tech Data Corp - Distributors CAD software for mechanical engineering; architectural
processes
08/03/2010 Triade Holding Tech Data Corp 61.7 0.0x Distributors Consumer electronics, and mobility and IT products to
retailers
08/05/2010 Shared Technologies Arrow Electronics 252.8 1.0x Integrator Converged and Internet protocol telephony technology
solutions
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DEAL PROFILESDISTRIBUTORS
Weve profiled below, two recent deals by Arrow Electronics that demonstrate a
few interesting moves by the company to expand its capabilities beyond just distri-
bution. Intechra provides Arrow with the ability to offer product lifecycle manage-
ment services while Shared Technologies provides telephony integration skills
Both deals demonstrate efforts by Arrow, along with other distributors, to move
into higher margin service areas that can rid on the back of their customer relation-
ships but offer the ability to offer services with much greater margin potential than
simple product distribution.
Intechra Group / Arrow Electronics:
Target: Intechra Group
Acquirer: Arrow Electronics
Date: November 2010
Description: "Intechra serves as a continuation of our strate-
gy to provide comprehensive services across the entire prod-
uct lifecycle for our suppliers and customers," said Michael
J. Long, chairman, president, and chief executive officer of
Arrow Electronics, Inc.
Intechra is headquartered in Jackson, MS, and has approxi-
mately 300 employees. Total sales were approximately $75
million for the most recent fiscal year. The transaction is
expected to be $.03-$.05 per share accretive to earnings in
the first full year of operations.
Source: Arrow press release, Arrow Electronics Acquires Inte-
chra, November 23, 2010.
Shared Technologies / Arrow Electronics:
Target: Shared Technologies
Acquirer: Arrow Electronics
Date: August 2010
Description: This acquisition builds on our strategy to diver-
sify into faster growing, high-margin markets that are com-
plementary to our existing businesses," said Andy Bryant,
president of Arrow ECS. "Shared represents an exciting op-
portunity as we add a leading player in the unified communi-
cations, telephony, and managed services industries to our
product portfolio. They bring deep customer and supplier
relationships as well as extensive industry and technical ex-
pertise."
Shareds sales in 2009 were approximately $250 million.
The acquisition is expected to be $.10-$.12 per share accre-
tive to earnings in the first full year of operations.
Source: Arrow press release, Arrow Electronics Acquires Shared
Technologies Inc, August 5, 2010.
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Below are profiles of twenty-four of the larger players across a range of spaces that we think are worth analyzing to understand the likelihood of their making acquisitions
outside of their core markets an into adjacent sectors.
ACQUIRER LANDSCAPE
Managed
HostingData Center Telecom
Systems
Integration
Rackspace Equinix Windstream BlackBox
Savvis (CenturyLink) Telecity Ikano Presidio
Hostway Digital Realty Trust Integra Fusion Storm
TDS Insight Enterprises
New Voice ServicesLarge Public
IT PlayersIT Distribution
cBeyond Dell Arrow
8x8 HP Avenet
BestBuy Ingram Micro
CDW
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
MANAGED HOSTING
Key Points
Managed hosting providers still have the benefit of significant growth opportunities
in their core businesses and thus dont face the same pressure to move beyond their
current areas of focus.
As a result, we expect that most larger managed hosting players will use M&A to
acquire niche players to better fill out their
core hosting business but do not expect to
see them expand into other areas such as
data center, managed services or on-
premise support.
Over time, we expect to see managed hosting players serve as targets for larger
telecom and data center players.
CenturyLinks acquisition of Savvis is likely just the beginning.
Hostway and Rackspace could well be targets in the managed hosting area
for larger players.
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Hosting RACKSPACE
2011 Rev: $1,025m Cash: $160m
2011 EBITDA: $293m Debt: $139m
2011 Net Income: $76m Market Cap: $7,946m
Publicly Traded. NYSE:RAX
Institutional Ownership: 70%
Rackspace Hosting (NYSE:RAX) provides cloud computing services, managing Web-based IT systems for small and medium-sized
businesses, and large enterprises worldwide.
Its service offering combines hosting on dedicated hardware and on multi-tenant pools of virtualized hardware in a way that suits each
customers requirements.
The company offers dedicated cloud services comprising customer management portal and other management tools for managing the
data center, network, hardware devices, and operating system
software.
It offers cloud servers for computing, and cloud files for storage, as well as cloud applications, such as email, collaboration, and file
back-ups; and hybrid hosting that provides hosted computing on
dedicated hardware and on pools of shared resources.
Business Description Selected M&A Activity
Key Financials
Key Executives
Ownership
Key Comments
Lanham Napier CEO
Lew Moorman - President
Rackspace has tended to make small acquisitions, primarily of technology-oriented businesses to help seed its internal efforts.
We think Rackspaces approach of small buys to seed internal builds is a smart strategy that allows the company to use its significant internal resources to avoid overpaying for expensive
assets that the company can otherwise ramp itself.
Rackspaces high trading multiples provide the company with a strong currency to use for acquisition.
Rackspace has been the subject of takeover rumors and could makean excellent addition for a major player looking to take a leadership
position in the managed hosting market.
Date Target Price
Rev
Mult. Description
2/16/12 SharePoint911 -- -- IT consulting services
2/10/11 Anso Labs -- -- Cloud consulting services
12/16/10 Cloudkick -- -- Cloud server management
10/22/08 Slicehost/Jungle Disk 28.0 -- Online storage services
4/25/08 Mailtrust -- -- Email hosting services
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Hosting SAVVIS
LTM (6/30/11) Rev: $1,016m Cash: $122m
LTM EBITDA: $241m Debt: $784m
LTM Net Income: NM Market Cap: $1,363m
Savvis was acquired by CenturyLink on July 15, 2011
Savvis (Subsidiary of CenturyLink; NYSE:CTL) provides cloud, managed hosting, managed security, co-location, professional and
network services worldwide.
The company offers hosting services comprising co-location services for clients seeking data center space and power for their server and
networking equipment needs; and managed hosting services for
clients IT infrastructure and network needs.
Managed hosting services include cloud services, security, virtualization, Web-based applications, business recovery, dedicated
hosting services, utility computing and storage services.
Savvis was recently acquired by CenturyLink and continues to serve its clientstier 1 Internet servicesthroughout the United States, Europe, and Asia.
Business Description Selected M&A Activity
Key Financials
Key Executives
Ownership
Key Comments
James Ousley CEO
William Fathers - President
Stewart Ewing CFO
While Savvis has been acquired by CenturyLink, we expect that the Savvis unit will continue to be a focal point for acquisitions for its
parent in the data center and managed hosting areas.
Unlike Verizon, who acquired Terremark, CenturyLink lacked any sizeable cloud services business prior to the Savvis deal so will likely
consolidate all its efforts through Savvis and continue targeted,
smaller deals as its integrates Savvis and refines its strategy for the
combined business.
Savviss future acquisition activity will likely be driven by efforts to find ways to leverage CenturyLinks business base of business customers.
Date Target Price
Rev
Mult. Description
6/1/10 Fusepoint 169.4 3.5x Infrastructure solutions
1/23/04 Cable & Wireless America 167.5 -- Telecom
7/30/03 Wam!Net 3.0 0.1x IT solutions
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Hosting HOSTWAY
NA
Private company
Hostway (Private) provides cloud, managed, and dedicated server hosting services to developers, startups, SMBs, and large enterprises
worldwide.
The Companys cloud hosting services include FlexCloud sites for small business Web hosting; virtual private servers for root access
with dedicated resources; FlexCloud servers for instantly deploying
servers and resources on demand; and FlexCloud private servers
that offer complete customization and privacy with public cloud
technology advantages.
Hostway also provides managed hosting services that include custom private cloud servers and customized hosting solutions; and domain,
email, and application services.
Hostway is headquartered in Chicago but has offices globally, including in England, France, Belgium, Germany, Australia and
India.
Business Description Selected M&A Activity
Key Financials
Key Executives
Ownership
Key Comments
Lucas Roh CEO
Jay Sinder - CFO
While Hostway has developed a solid business, much has come through organic growth as the company has made few acquisitions
in recent years.
Given the companys private equity ownership, we expect Hostways shareholders are likely focused on a path to liquidity and will thus require any acquisition to show very near term impact.
Transactions that could be near-term accretive for Hostway would include acquisitions of similar businesses where they are effectively
adding customers and can realize synergy through scale or cost
reductions.
Date Target Price
Rev
Mult. Description
4/4/07 Affinity Internet -- -- Web design
2/12/04 Registry Services -- -- Infrastructure
1/13/04 Enterprise Networks -- -- Hosting
6/13/03 NetNation Communications 10.1 0.9x Infrastructure
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
DATA CENTER
Key Trends
We expect the leaders like Equinix, Digital Realty and Telecity to continue to solidify
their leadership positions with acquisitions
of smaller players, primarily to expand into
new geographic markets.
In fact, much of the recent M&A activity by Equinix and Telecity has been aimed at
moving into new markets in Asia, Latin
America, Ireland, and other locations.
While data center players will likely to continue to consolidate smaller players, the
more significant trends will likely be
continued consolidation between data
center players and telecom service
providers as well as the expansion by data
center players into higher margin managed
service and managed hosted offerings.
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Data Center EQUINIX
2011 Rev: $1,607m Cash: $915m
2011 EBITDA: $666m Debt: $3,099m
2011 Net Income: $94m Market Cap: $7,709m
Publicly Traded. NasdaqGS: EQIX
Institutional Ownership: 97%
Equinix (NasdaqGS:EQIX) provides data center services to protectand connect the information assets for enterprises, financial
services companies, and content and network providers. The
Company connects businesses with partners and customers through
a platform of data centers containing dynamic ecosystems and the
broadest choice of networks.
Equinix offers: Data service centers and co-location services. Interconnection services across physical and internet
exchanges.
IT infrastructure services.
Equinix provides its cloud-based products and services through a global network that spans more than 38 markets across 13 countries
and 4000 businesses.
Business Description Selected M&A Activity
Key Financials
Key Executives
Ownership
Key Comments
Stephen Smith CEO and President
Keith Taylor - CFO and Principal Accounting Officer
As one of the leading data center players, Equinix faces the challenge of how to continue pursuing acquisitions in a way that will
make a material impact on its business and better position the
company against highly capitalized telecom competitors.
Over time, we expect that Equinix may begin using M&A to move into newer cloud services offerings including high end managed
hosting and specialized IaaS offerings for enterprise customers.
Continued Geographic expansion will also be a key part of M&A for the company going forward as it continues to build out its global
footprint. Look for more international deals like its recent Asia
Tone acquisition.
Date Target Price
Rev
Mult. Description
5/1/12 Asia Tone Limited 230.5 -- Data center
2/21/12 Carpathia Hosting 1.5 -- Hosting solutions
10/21/09 Switch & Data Facilities 870.2 4.3x Interconnetion
7/29/09 Upminster 28.2 -- Data center
2/5/08 Virtu Secure 25.6 -- Data center
6/28/07 IX Europe 558.1 7.1x Data center
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Data Center TELECITY
2011 Rev: $379m Cash: $35m
2011 EBITDA: $168m Debt: $296m
2011 Net Income: $67m Market Cap: $2,474m
Publicly Traded. LSE:TCY
Institutional Ownership: 79%
Telecity Group (LSE:TCY) provides network independent data centers that offer colocation and related services in Europe. The
Company offers:
Hosting and support services. IT infrastructure design and consulting services. Network and connectivity services. Internet security, including firewalls, intrusion detection and
prevention, and distributed denial of service mitigation.
Data storage including backup and disaster recovery Server management and performance optimization
Telecity Group provides its clients with cloud-based technology and services through a global network that spans 29 data centers in
Amsterdam, Dublin, Frankfurt, London, and other major European
cities.
Business Description Selected M&A Activity
Key Financials
Key Executives
Ownership
Key Comments
Michael Tobin CEO and Director
Brian McArthur-Muscroft Group Finance Director and Director
CEO Mike Tobin recently stated Looking forward, there is still significant growth for us to capture, both in our existing markets
and in new markets in Europe, as the Internet continues to grow and
the cloud increases in significance.
We expect Telecity to continue building out its core data centerbusiness with bolt-ons in existing markets and other small deals that
bring it into new geographic markets.
Date Target Price
Rev
Mult. Description
9/23/11 UK Grid Network 18.1 6.5x Data center
8/8/11 Data Electronics Group 143.0 6.7x Telecom
8/2/10 Internet Facilitators 30.7 -- Data center
8/20/06 Globix Holdings 62.1 -- Hosting services
11/2/05 Redbus Interhouse 104.6 3.0x Data center
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REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers
Data Center DIGITAL REALTY TRUST
LTM (3/31/12) Rev: $1,100m Cash: $26m
LTM