* Online storage in demand
* Telcos and cable firms seek off-site storage services
* M&A activity could shift to Europe
* Valuations boosted by recent deals
By Saqib Iqbal Ahmed and Nadia Damouni
BANGALORE/NEW YORK, May 3 (Reuters) - Surging Internet traffic, growing demand from business and an explosion in the number of mobile devices have ramped up demand for online storage, triggering a race among telecoms firms and equipment makers to acquire web hosting companies.
These managed hosting services providers usually own or lease space on a server for use by their clients, typically in a data center -- large warehouses lined wall-to-wall with powerful computer storage servers .
Bankers and analysts cite Equinix , Internap , Rackspace , InterXion Holding NV and private firms SoftLayer Technologies Inc and Joyent as potential targets for bigger technology companies looking to cash in on growing demand for so-called cloud services.
Further consolidation is likely in the wake of Verizon Communications Inc's $1.4 billion bid for Terremark [ID:nN27272578] and phone company CenturyLink Inc's more recent $2.5 billion acquisition of Savvis . [ID:nL3E7FR29S]
"Telecom and cable companies are at a point where they need to join the cloud game, or be left behind. Some are trying to catch up through acquisitions," Rackspace Chief Technology Officer John Engates said in an e-mailed response to a Reuters inquiry.
Data center services are much in demand, driven by scorching growth in telecoms and cloud computing -- an increasingly popular technology that allows remote access to computing power and data over the Internet.
Acquisitions are an easy way for telecom companies to load up on data centers and co-location -- off-site data storage services.
"It's reasonable to suggest that whether it's a systems integrator or a large distributor, they will look at the likes of a Rackspace and some others out there," said a senior industry banker, who has worked on similar deals but asked not to be named.
VALUATIONS BOOST
Recent deals valuing target companies at 10-14 times forecast EBITDA -- earnings before interest, tax, depreciation and amortization -- have boosted valuations, and analysts reckon companies may see this as a good time to put themselves in the shop window.
Not Rackspace, however.
"Rackspace is committed to remaining independent. We are not interested in being acquired," Engates said.
While Rackspace may see its independence as a way to forge service leadership in the cloud, Benchmark Co analyst Clayton Moran said the company may be missing a trick.
"There is a risk in any action or inaction," said Moran. "There's definitely a risk that business trends could slow and valuations could recede, and therefore Rackspace would have missed an opportunity."
Concerns have grown over the reliability of cloud services after recent disruptions at Amazon.com Inc servers took down many social networking web sites and hackers stole personal details of millions of users of Sony Corp's video game online network. [ID:nN21283190] [ID:nL3E7FR05U]
Benchmark's Moran noted Internap as the closest publicly listed company comparable to Savvis, though much smaller, and said it could be a takeover candidate as telecom companies look to broaden their services for businesses and enhance growth.
"We view AT&T Inc , CenturyLink and other telecoms and cable companies as potential consolidators, with Internap as an easily digested target," he said. Internap provides co-location, managed hosting and some telecom IP services.
"Given AT&T's two largest wireline competitors have done something, I'm sure they're still entertaining how to address the space," said the industry banker.
Internap CEO Eric Cooney declined to comment on any approaches it may have had, but noted the recent spate of deals highlights a trend of businesses seeking to outsource their IT infrastructure services.
He said that trend is likely to accelerate.
EUROPE IN FOCUS?
With fewer U.S. public companies still up for grabs, the banker flagged Dutch data center company InterXion as a likely target, adding he was surprised there had not been more consolidation in Europe.
The last sizeable deal involving a European company was in 2007, when Equinix bought data center operator IXEurope for $482 million.
Telecom providers like AT&T and Verizon and equipment makers like Dell Inc , Hewlett-Packard and IBM are typical buyers, with scale and clout, in the sector.
"We see a growing fit between the sale of data center services and traditional telecommunications services," said Evercore Partners analyst Jonathan Schildkraut. "This is even more pronounced as it applies to providers of managed hosting and or cloud-based services."
Second-ranked U.S. cable television provider Time Warner Cable's $230 million acquisition of Navisite Inc in February highlighted multiple system operators as potential buyers, too, as cable companies target small- and mid-sized businesses. [ID:nSGE7110CR]
On a smaller scale, there are plenty of competitive U.S. local exchange carriers which could try to move into this market, said Evercore's Schildkraut, mentioning TW Telecom Inc , Paetec Holding Corp and EarthLink Inc as likely buyers.
"There's a really natural fit, particularly in the small and medium business space, to match up a managed hosting, cloud hosting platform with the sale of Internet access and the management of e-mail boxes, etc," he said. (Reporting by Saqib Iqbal Ahmed and Supantha Mukherjee in Bangalore and Nadia Damouni in New York; Editing by Ian Geoghegan)