2010 Stock Picks For Data Hosting And Storage Sector Of Web Services Industry

January 29, 2010 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the Internet Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.

>>TWST: Tell us more about the pending acquisition of Switch & Data (SDXC) by Equinix (EQIX). What is your take on other acquisitions we might see in this space this year?

Mr. Weller: As far as Equinix and Switch, we are positive on the merits of that transaction. We think there are different angles to it. Equinix was able to get some increased capacity in certain big markets in the U.S., and there is no doubt that network-neutral, co-location has been a supply-constrained market. It also gives them an entree into second-tier markets. There should be some meaningful synergies in this transaction related to cost and revenue synergies, and I think they've talked about an initial number there in the $20 million area. Then there was, I believe, the defensive angle for this acquisition, too, in the filing related to the merger.

The other option for Switch & Data was a merger with an international company. So there are a couple of pretty big international network-neutral, co-location players that could have established a pretty good position in the U.S. with Switch, and that takes that off the table. The one uncertainty with respect to the acquisition is it still has not been approved by the U.S. Department of Justice. And actually last week, they issued a second request for information, as they're going to review that merger for antitrust issues. So we're still kind of waiting upon that, but we think ultimately the transaction is likely to go through. I'm not sure that kind of foretells a big increase in M&A in that sector. I think that transaction will likely be a little bit unique, although there are some angles. So if you think about 2010, I would think about a couple of different things.

First, I think it's possible you could see some of the up-and-coming private companies go public - companies like Telex and CoreSite that compete with Equinix. The other angle here would be that you do have some large international network-neutral, co-location providers that might look to still establish presence in the U.S. And so companies like Telecity (TCY.L) or Interxion could look to Telex and to CoreSite as M&A candidates. So I would expect that when we look back on 2010, you will see IPOs from these private companies, or they will be bought by some of the international players.