Q9 Networks acquired by private equity firm

Toronto-based outsourced data centre infrastructure provider Q9 Networks Inc. can certainly expand its scope into the U.S. market after being acquired by American private equity firm Abry Partners LLC , said one analyst.

The fact that Q9 has likely saturated Canada’s large corporate market – Toronto’s financial core – many of which are U.S. multinationals, according to Jon Arnold principal with J. Arnold & Associates , “gives them more leverage to do both markets and to aggregate more volume.”

Q9 announced Sunday that it had entered into a definitive agreement to be acquired by CDC Acquisition Corp., an affiliate of Abry Partners, a transaction valued at approximately $361 million.

Peer 1 Networks Inc. , a rival player in the outsourced data centre infrastructure space, has greater revenue than Q9 and has a business base primarily in the States, said Arnold, however, the acquisition will now allow Q9 a similar scope. Fusepoint Managed Services Inc. is another major player in this space and also privately-owned.

Q9 also said last week that it would open a third data centre in Calgary, adding to its other facilities in core and suburb locations, like Toronto and Brampton, respectively. Therefore, said Arnold, the ability to cater to customers willing to pay a premium for the convenience of local proximity, and those preferring to pay the lower price, may have been a factor for Abry Partners, said Arnold.

But besides essentially buying Q9’s real estate, “the name of the game in the data centre is about uptime”, said Arnold, and the company has definitely built a reputation for being a “top quality outfit.”

Arnold said he can’t say why Q9 agreed to get bought by an American firm, but speculated that there are few Canadian firms whose pockets are deep enough to make the purchase. Abry Partners did not comment by press time.

Going from a public to private organization doesn’t really change much for Q9, said Eamon Hoey, senior partner at Hoey Associates . If anything, the North American market is “just catching up to Europe to some degree” in terms of the proportion of private to public ownership.

However, the fact that Q9 is being acquired certainly aligns with the “slow rollup of companies” in the market, where, as with any other industry, said Hoey, the managed data centre services industry is going through a stage of consolidation as it matures.

The consolidation will allow Q9 to meet customers’ growing global needs because “it’s not sufficient to be in the ten major cities in Canada,” said Hoey, “you have to be in the ten major cities around the world including Peking and Shanghai.”

According to Darin Stahl, stream lead for the infrastructure group with London, Ont.-based Info-Tech Research Group Ltd., ownership by Abry Partners means regulations around customer data flow will apply. However, he said, “as long as the data is at rest inside of Canada if you’re a Canadian regulated firm, I don’t think you’ll have a big issue.”

But regulatory issues aside, Stahl said the acquisition is “fantastic news” given the outsourced data centre business necessitates a different approach. “If I want to expand my new line of printers, there are lots of cheap ways,” said Stahl, “but in the data collocation business, you’ve got build it and then sell it. It’s a whole different ball game.”

Stahl noted that the purchase Q9 is not the first acquisition of its kind for Abry Partners. The private equity firm bought CyrusOne in July 2007, and Hosted Solutions last April – both with successful footprints in the data centre business. “So when you look at this group buying into Q9, that says something,” said Stahl, referring to the fact that Abry has garnered experience in acquisition due diligence.

But more importantly, said Stahl, the aggregation of expertise and knowledge from amalgamating providers like Q9, CyrusOne, and Hosted Solutions, means that “as a customer, there is the ability now to work with a player [like] Q9… but now [customers] can draw upon maybe other solutions, other talent…”

If anything, the acquisition speaks to a growing market, said Stahl, citing research that shows that 80 per cent of North American businesses in the next three years will be faced with the challenge of site renovation or a building move, triggering a decision to either focus on the core business or run an on-site facility.

But that’s not the only driver behind the managed data centre market. As virtualization gains traction in the enterprise, virtualizing in a managed environment, said Stahl, will appear an attractive option because providers can use their knowledge to render a good service to customers, because the provider itself will have had to address those same issues.

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