Acquiring data centers? Don’t overlook these critical areas during due diligence

The level of data center M&A activity is growing at a rapid pace. Today, with nearly $50 billion in value across almost 200 data center deals according to Synergy Research Group, real estate investment companies, data center service providers, and enterprise clients often ask for help reviewing an asset, or a portfolio of assets, that they are considering acquiring to ensure they have a clear picture of what they intend to purchase.

Reviews involve visiting some or all the data center assets being acquired – or alternatively completing a document review of relevant drawings and documentation that have been obtained related to the site. Given the tight schedules associated with pending M&A deals, it’s also important to understand and work within the urgency these projects require.

Going beyond physical assets

Critical facility due diligence efforts include reviews and assessments of existing asset conditions, one-line diagrams, equipment age, building management systems, capital expenses (CapEx) and operational expenses (OpEx), tier levels and equivalents, energy efficiency, and potential points of failure. Efforts often also include a rough order of magnitude estimate (ROM) for expansion, upgrades, or improvements identified during analysis.

But due diligence must go beyond physical asset assessment to include additional areas that need to be understood as part of any merger or acquisition, such as reviews for:

Service level agreements (SLA) SLAs that providers have with tenants could contain hidden CapEx/OpEx exposures – for example, hidden CapEx costs related to insufficient maintenance budgets in future years that can impact margin estimates in the business case, revenue models per geography, and security and compliance.

Environment, health, and safety (EHS) EHS reviews, including potential ground pollution, EHS compliance, and environmental permitting for operational data centers as well as those in the planning or construction phases, will evaluate any compliance issues or risks. This is particularly important to both the vendor and purchaser to understand what long-term and costly liabilities can be associated with pollution or occupational health.

Environmental, social, and governance (ESG) Increased pressure from customers, investors, and public stakeholders has increased focus on climate change risks and opportunities for the digital global economy. This includes not only achieving ambitious information and communication technology sector commitments for net zero decarbonization, but also mitigating the risks from extreme climate events on critical data centers and networks and the critical energy and water infrastructure supporting them.

Operational procedures, maintenance management, and staffing These elements drive costs and are also frequently important in data center outages. In addition, a review of commissioning reports and historical failure incident report logs can identify reasons for past failures typically resulting from human error and in some cases, more serious issues with building infrastructure.

IT systems architecture It’s critical to understand the applications, security, and processes in place for both the acquirer and the target company. These elements are key revenue drivers and important to understand the expected synergies, integration costs for multiple systems, and risks to the overall data center.

While often overlooked, understanding these critical areas of an M&A deal during the due diligence phase should be included in the process.

Making informed decisions

A systems architecture assessment is important due to the tight integration and effect that it can have on the operations, management, and client. The enterprise and operations back end can seriously impact the underlying effectiveness of services and total cost of ownership (TCO).

Choices of operations management suites, monitoring tools, client portals, and use of cloud or SaaS/PaaS all have definitive impacts on Capex/Opex and the reliability and resiliency of the facility asset. This integration goes to the value of the purchase or more importantly, uncovers potential future state investments that may be needed.

Without this type of additional analysis, the acquirer may not have a sufficient understanding of the value of an asset to make informed decisions.

How can Ramboll help

We combine decades of experience in physical assessments of existing critical facilities, and design and retrofit of new ones, with a long history in operations and testing to design facilities for optimal performance. Our experts advise clients on how to improve performance and minimize the risk of equipment and human-caused failures.

As the data center industry evolves from enterprise facilities to colocation and hyperscale data centers, our capabilities have expanded to address this change. We advise enterprise clients on how to begin migrating their IT loads and assets to the colocation and service provider marketplace and assess integration beyond facility systems.

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