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Switch and Data says deal boosts business -- and it's actually growing
March 17, 2003
Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) has sold its PAIX.net Inc. subsidiary to privately held Switch and Data for $40 million cash (see Switch and Data Acquires PAIX).
The deal is significant on two counts. First, it seems positive for buyer and seller alike. Second, it highlights developments in the collocation market.
Switch and Data execs say the acquisition gives the right combination of services to ensure ongoing growth -- like, double-digit growth (more on that in a minute). The sale also should help MFN, at least a bit. The ailing carrier released its official restructuring plan last week (see MFN Plans Reorganization). Though the proceeds from the PAIX sale must be shared with bankers, according to MFN's Chapter 11 arrangement (see MFN Falls Into Chapter 11), it should still help the carrier's cause.
The deal also runs counter to predictions of a dwindling collocation market (see Hosting: Squeezing Out Growth in '03). "We don't see the collocation market as bleak. It's continuing to thrive," says Switch and Data CEO Patricia Higgins. "Demand is there."
But Higgins says the right approach is key to future success. What ISPs want is a blend of collocation and interconnection services that enable them to house their gear in secure, value-added switching and data centers and get Internet connectivity that's not associated with a specific carrier.
"Neutrality" is the word that applies. Unlike arrangements in which carriers exclusively permit each other access to one another's key Internet connections, the PAIX business model is based on offering the same service levels to all its customers.
The approach didn't sit well with MFN, which not only was PAIX's owner but also its customer. Because MFN sold its own IP services, it wanted a partner that could offer business exclusively for its own use, providing an edge on its wholesale business. Unfortunately, PAIX couldn't favor MFN and hope to stay alive.
Switch and Data's model is surely a better fit. The company doesn't sell IP services. Instead, it owns its own collocation buildings, and up to now has partnered with others -- including PAIX and Level 3 Communications Inc. (Nasdaq: LVLT), to name just two -- to offer the interconnection services.
Higgins says the acquisition of PAIX extends Switch and Data's ability to expand neutral services in several directions. It extends the number of cities the firm can function in. It grows the customer list to 426. (33 customers were common to both firms, Higgins says, but there's no overlap, since PAIX offered the customer interconnection and Switch and Data the collocation.)
What's more, having its own interconnect partner will let Switch and Data beef up its offerings with additional quality of service guarantees and, perhaps, services tailored to specific types of applications, such as storage. Deals with other carriers, Higgins says, won't be affected.
"We speak of revenue per square foot in collocation services," she says. "As you start to add more services, that figure goes up. With PAIX, we're almost tripling our revenues per square foot."
Switch and Data claims positive EBITDA (earnings before interest, tax, depreciation, and amortization). The addition of PAIX will immediately raise revenues 30 percent annually and bring the newly combined company to positive cash flow, say company officials.
At least one analyst thinks the deal's an overall positive. Andrew Schroepfer, founder of Tier 1 Research, says the addition of PAIX gives Switch and Data access to a broader set of carriers to connect to.
Schroepfer also sees hope in the combination of collocation and interconnection -- though he's not as enthusiastic in his assessment as Higgins. He says the collocation market is growing modestly. Neutral interconnection is up more dramatically, but it's building from a small base.
The company is not without competitors, though, including Equinix Inc. (Nasdaq: EQIX), which made a $50 million acquisition of its own recently in the Asia/Pacific region (see Equinix Merges Its Way Into Asia-Pac). In end-of-year 2002 results, Equinix posted $77.2 million in revenues, a 22 percent increase over 2001.
PAIX doesn't have international presence yet, nor can it show revenues like these. According to MFN, PAIX accounted for about 10 to 12 percent of sales reported by MFN, which has filed monthly reports showing revenues of $20 million to $24 million for the past several months.
— Mary Jander, Senior Editor, Light Reading
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