• Ancillary services offer way into pricey data center market
• Boyd thermal business sale showcases strategics’ interest

Data centers face a problem as they try to compete with the industry standard of rapid computing and processing speeds: cooling at the same rate.

HVAC and cooling solutions services and equipment companies, which specifically service data centers, have seen increased M&A interest for this reason, according to multiple sources.

Just like an individual desktop computer overheats when it’s working too hard, so does a data center. But an overheated data center strains the grid and surrounding electricity infrastructure, said Justin Wolfort, Brown Gibbons Lang diversified industrials and engineered equipment director. He noted that BGL has multiple ongoing deals in the space.

Strategics are showcasing the need to bring cooling solutions in house. Power management company Eaton recently announced a USD 9.5bn deal to buy Boyd’s thermal business to provide cooling solutions for its data center customers. According to a press release, the pending deal’s value represents a 22.5x multiple.

“I’ve never seen anything like this in my career,” said Tony Atti, the CEO of Phononic, a cooling solutions company for data centers. “… I do think there’s an elevated level of investment that’s unprecedented, that seems to have a three- to five-year tail.”

According to Atti, the power budget for cooling is often on par with the budget for processing and computing. There are many disparate “hot spots” in a data center from the memory center to the computer processing unit (CPU), Atti said, and typically they are cooled in a “patchwork” approach that often does not keep up with processing speeds. Data centers need a mix of fans, air, water, and other cooling solutions to address these issues.

William Blair Supply Chain & Commercial Services managing director, Rashmi Singh agreed that demand has increased over the last year to year and a half, calling it a “mini capex super cycle.”

HVAC comprises about 30%-35% of the data center budget, Singh said. “It’s not just HVAC and cooling, but even electrical services,” Singh said. “… It’s a rising tide that goes across the electrical ecosystem.”

According to Singh, this demand could drive M&A for years, if not decades.

And there is still room for consolidation within the cooling solutions subsectors. “The individual component part of the market is still very fragmented, and if you’re not developing the technologies as strategic, you’re going to ultimately end up having to buy them,” Wolfort said. “So, I think that private equity is going to look at any different points within the cycle.”

He noted that ancillary offerings like monitoring and equipment could see increased interest.

Cooling solutions also offer a way for investors to get in on the data center market when they may be priced out of data centers themselves, Wolfort said.

Strategics and private equity are some of the most significant bidders, Wolfort said. “I can get confidence that, as far as the eye can see, there’s demand. And that demand is going to be, frankly, insatiable.”