The SunGard Acquisition of VeriCenter and the Reshaping of the Hosting Industry

Posted on July 17th, by thinkstrategies in Data Return, managed services, SaaS, Software-as-a-Service, SunGard, Terremark Worldwide, Vericenter. Comments Off on The SunGard Acquisition of VeriCenter and the Reshaping of the Hosting Industry

Yesterday’s announcement that SunGard intends to acquire VeriCenter clearly indicates that the competitive landscape in the hosting business is rapidly changing.

Not only is this another indication of industry consolidation and the growing role of private equity firms in the IT services sector, it is also another example of how the managed and Software-as-a-Service worlds are converging.

The first message that this transaction sends to any hosting company that hopes to be a market leader is that they can no longer depend on the simple annuity of managed server and co-location services. Instead, hosting industry leaders will need to offer a broader portfolio of managed and SaaS capabilities in order to become a strategic source for their enterprise customers.

Sungard is a perfect example of the power of private equity. On March 29, 2005 the company was acquired by a consortium of seven private equity investment firms for $11.3 billion, the largest private equity transaction at that time. The firms involved were Silver Lake Partners, Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co., Providence Equity Partners, and Texas Pacific Group.

The timing of their acquisition couldn’t have been better. A growing number of corporations were turning to hosting companies to offload their server management and processing requirements. Concerns about disaster recovery and business continuity were also escalating.

Today, SunGard generates over $4 billion in revenues serving over 25,000 customers in more than 50 countries, including the 50 largest financial services companies in the world. The company has also established a strong customer base in the higher education and the public sector.

VeriCenter will be merged with SunGard’s Availability Services division. This unit boasts 3 million square feet of operations space in over 60 data centers, linked by a 25,000 mile-dedicated network, and augmented by over 50 mobile facilities. The unit’s service delivery infrastructure supports over 30 computing platforms for over 10,000 businesses and institutions across North America and Europe. Although VeriCenter has a smaller installed base of approximately 600 business customers, it offers a broader portfolio of managed services.

While many industry observers view the managed services and SaaS market as separate albeit related business opportunities, smart hosting companies are recognizing they can capitalize on both. In addition to offering the standard set of centralized server management and co-location services, hosting companies can now deliver a wider array of remote managed services aimed at helping customers administer their on-premise systems, and offload their security and storage requirements. Leading edge hosting companies are also positioning themselves as a channel to market for a rapidly expanding array of SaaS solutions.

The SunGard/VeriCenter deal also represents another example of the continuing consolidation of the hosting business. Another example was the acquisition of Data Return by Terremark Worldwide, Inc. in May.

I expect these trends to accelerate in the coming months.

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