One of the last year’s biggest deals in the data center sector was DataBank’s purchase of zColo from Zayo. The purchase tripled the company’s data center footprint and doubled its market coverage, instantly giving it not just a nationwide US footprint but a starter set in Europe as well. As part of Digital Colony’s portfolio, the company looks well positioned to invest further going forward as well. With us today to talk about the zColo deal and integration, other expansion efforts, and the effects of the pandemic on the sector is CEO Raul Martynek. This is a return visit by Raul, who stopped by for an Industry Spotlight two years ago.
TR: Let’s get right to it. How did the zColo deal come about, and what was your rationale to pursue such a major transaction?
RM: DataBank’s trajectory over the last four years had taken us from 6 data centers in 3 markets up to 20 data centers in 9 markets. We made a number of small acquisitions to expand into new geographies where we would then build new facilities. But we always have been looking at transformational deals that could catapult the company to the next level in one fell swoop. We actually looked at quite a few but decided to pass, because ultimately, we were looking for the right profile. When Zayo decided to sell zColo, we saw a number of characteristics we believed were a good fit with DataBank’s long-term strategy. One, they were predominantly colocation. Two, we saw an underutilized, underappreciated interconnection asset. Zayo is one of the biggest dark fiber providers and with their focus on being a network operator, we felt they hadn’t leveraged the full power of that interconnection ecosystem. And three, they had some great enterprise data centers and customer relationships but had been more focused around selling network services. We felt the performance of the colocation assets could be improved by integrating them into DataBank’s “colocation first” platform that both understands the importance of those interconnect ecosystems and has the capital to continue to expand them.
TR: Prior to this deal, DataBank seemed more enterprise-focused than zColo, which seemed more about connectivity. How much different is the combined company’s focus from DataBank’s origins?
RM: zColo had enterprise data centers like DataBank, but with a larger interconnect component. Of DataBank’s prior 20 data centers, about five included interconnect assets, but mainly in secondary markets like Pittsburgh, Cleveland, Salt Lake, and Indianapolis. But it wasn’t at enough critical mass to really be a national player with that type of product. Now, we have those same types of premier interconnect assets but in Tier 1 markets. We are now the meeting room operator at 60 Hudson in New York City, which is one of the most connected buildings in the world. We have a great interconnection site at One Wilshire in Los Angeles, and at 840 South Canal in Chicago. The deal dramatically expands the geographic scope and reach of our interconnect capability and allows us to be a more relevant player.
TR: How is the integration going so far? How much is left to do?
RM: We closed on the US and the UK assets in December, and in February closed on the French data center assets, which involved a separate regulatory process. All 44 data centers are now 100% part of the DataBank platform. We have been working on the integration since we signed the deal in October, and we are making incredibly good progress. Basically, we are extracting ourselves from the Zayo Networks systems, executing on all the initiatives needed to get us separated from the former mother ship so that we can migrate into the DataBank systems and processes. We’ll have 80% of that integration done by the end of Q2, but it’s something that we’ll be working on all year. The other important part of the integration is building a unified culture. If you don’t have a great culture and an engaged employee base, you don’t have anything. Your customers are kind of the other side of that coin, and it’s your people that create the customer experience. We did a lot of work at DataBank around understanding how to do that, and with the zColo acquisition we’ve been able to bring all that work to the forefront when it comes to leading our integration efforts.
TR: You also recently purchased a stake in EdgePresence. How does EdgePresence’s approach fit into your view of the edge?
RM: My views on the edge have continued to evolve as the sector itself evolves. The zColo deal was a $1.4B transaction while EdgePresence was just $30M, but I view them as both equally important in terms of our long-term strategy around the edge. We believe that there is a fundamental re-architecting of the internet occurring, and that it’s going to happen in two broad buckets. One will be a geographic expansion around major metropolitan areas, which is where the zColo assets and the existing DataBank assets fit. And the second will be around highly specific locations. The EdgePresence deal really gives us another tool in our tool belt around geographically specific edge locations. There are a number of applications and use cases emerging where you will need to be incredibly precise about where you want to have that carrier-neutral interconnection, third-party colocation option. The two are complementary. Having both the broad footprint of 65 data centers and this ability to bring the edge anywhere a specific use case demands – what we refer to respectively as our “hyperscale edge” and “low-latency edge” – DataBank positions itself to be the leader around this next phase of data center infrastructure.
TR: How do you view M&A as a path to further growth in today’s market?
RM: We are going to be continually acquisitive. But now that we have a presence in 25 US markets, we already have a good foothold in a lot of the places that we believe demand will continue to manifest itself. DataBank has also been very active from an organic development standpoint, and now that we have the geographic reach and customer relationships, I think you’ll see us do a lot more organic expansion than M&A. Ultimately, it is cheaper for us to build our own data centers and lease them up organically than it is to acquire, given where multiples are in the space. That being said, if the right opportunity shows up and it fits with our strategy, then yes, we will take a run at it.
TR: What organic expansions are you investing in now and in the near future?
RM: We’re expanding in Minneapolis, building a new 14-acre campus with phase 1 being a 9MW building with the ability to expand to 27MW. We’re expanding in Salt Lake City on our 23 acre Bluffdale campus. We also have kicked off expansions in a number of legacy zColo markets like Los Angeles, Ashburn, San Diego, Denver and Las Vegas. Ultimately, we are going to follow our customers and expand in markets where we see future demand. Where customers need capacity will dictate a lot of our new builds.
TR: The zColo deal also gave you a presence in Europe. How does that fit into your future plans?
RM: The European asset is a great foothold, one data center in London and five in France. But obviously, if we want to really compete in that market, we’re going to need to invest further there. But first we are taking a phased approach and ensuring that we have our strategy together on the US side while we think through what our long-term strategy will be in Europe.
TR: How about your product portfolio? Do you have plans to add services and capabilities, or do you have in place what you need already?
RM: DataBank has been primarily a colocation business from a product perspective, and the innovations in that space have been mainly around delivering high density solutions and more cost-effective but redundant power and cooling systems. We think that we’ve done a lot of work on the colo product side already. The managed services side of our business has done well over the last couple of years, and we are seeing good uptake there by our colocation customers. We orient that business toward making those solutions appealing to our colocation customers. The place you’ll see us invest the most is around the interconnection and connectivity story. We believe that we now have a unique set of assets around interconnect. We want to expand that product capability to allow for more automation, more discovery, more self-service and more of an ecosystem and marketplace. That is something that is definitely on our roadmap, and we hope to make some meaningful announcements in that area later this year.
TR: How did COVID-19 affect the zColo deal process and the integration you are working through now?
RM: Before COVID, if someone had told me you could successfully close a transaction of this nature and then perform an integration, I would have said it was impossible. Twelve months into COVID, working together as an organization to meet our customers’ demands, I don’t feel like we’re having any drag because of it. You could actually argue that it has made us more efficient by avoiding all that time consumed by travel and face-to-face meetings. In some ways, the pandemic has obviously made it more difficult, but the efficiencies gained by video meetings and other new ways of communicating are compensating for it. So, I expect we will continue to plow right through the integration regardless of what happens. And hopefully if the COVID-19 numbers keep trending in the right direction, then by the end of Q2 or so, we will be in a place where we can travel for those situations where face-to-face meetings make sense.
TR: Do you think these changes are permanent, or will things revert back to the way they were?
RM: Humans are creatures of habit; however, I don’t think we’ll go back to the old way. I think what we will try to do is come up with a hybrid. When do travel and group meetings actually make sense? When does coming into the office make sense? When does staying home and working remotely make sense? If we can figure that out, we will have even greater ability to improve our business and services and make our employees happier with their work lifestyle.
TR: So, what are the challenges ahead for 2021, what are the things that keep you up at night right now?
RM: We have a lot of balls in the air across a lot of different areas. We have to move at a rapid pace that allows us to continue to get through this integration. But we also have to make sure that we don’t drive too hard and burn people out. We need to always have gas in the tank for the next big hill that we will have to climb.
TR: Thank you for talking with Telecom Rambling
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