May 9, 2023 - 04:25pm

Baker Botts: Deal opportunities abound in datacentre space

By Baker Botts partners Dino Barajas, Jonathan Gordon, Neil Torpey, Nicole Perez, Stuart Blythe, and associate Nikolai Gryzunov

Datacentres are critical for the storage, management, processing and distribution of global data, the amount of which is estimated to reach over 180 zetabytes (1021 bytes) by 2025 according to Statista. Associated with this, datacentre dealmaking has reached an all-time high in the past two years. According to Synergy Research Group, 2022 saw the closing of US$48bn worth of M&A deals in the datacentre segment, on par with the US$49bn worth of such deals closed in 2021. With their capital intensive nature, opportunities for growth and predictable utility-like cash flows, datacentres have been a natural point of interest for private equity and infrastructure funds, which accounted for 91% of total value of datacentre M&A deals closed last year.

While datacentre M&A activity may be slowing down (as is M&A activity in general), and while datacentre operators are facing challenges such as power supply constraints in certain jurisdictions, a more cautious approach to capital expenditures, pressure on operating margins through major customers extracting more favorable lease terms or building their own facilities, and generally putting on hold some hyperscale projects (i.e. “in-house” datacentres owned and operated by technology majors), record-low datacentre vacancy rates and the ongoing pursuit of numerous projects, particularly in the colocation sub-segment (i.e., space in datacentres rented out to third party customers), provide an indication that datacentres may be less impacted by macroeconomic uncertainty than certain other industries. The datacentre industry overall is expected to grow 3.4% globally in 2023 according to Gartner, and we expect to see robust deal activity in this space, including in M&A transactions, joint ventures, power purchase and sale activity, development projects, ESG matters and deployment of technological innovations (e.g. processors, and cooling and heat management).  

Meeting the demand

To be built, datacentres require available and appropriately-zoned land, as well as power connectivity, both of which can be scarce in certain locales like Northern Virginia and the Pacific Northwest. As a result, a pre-construction stage datacentre project with appropriate land use approvals and power grid connectivity can be an appealing target for interested acquirers. Similarly, various hyperscale-centre developers that are reportedly reconsidering their in-process projects (particularly those in industries experiencing short to medium term pressure) may elect to sell their datacentre assets as an alternative, creating additional opportunities for acquirors.

In light of challenges associated with building large datacentres in or adjacent to major urban areas, investors in the datacentre space are increasingly exploring opportunities to locate large-scale datacentres away from oversaturated locations, to leverage user proximity offered by metropolitan areas to develop smaller scale datacentres in suburban and ex-urban areas, and to develop pre-fabricated modular datacentres.

Further, as datacentre operators seek to optimise solutions to stay competitive and meet the demand, they are seeking to streamline their operations to increase synergies, leverage existing R&D, connectivity, supplies and relationships. As a result, we expect to see further deals within the industry in search of the best owner for each asset.

Improving existing capacities

Accounting for 2% of electricity consumption in the U.S. and 1 – 1.5% of electricity consumption globally (with global consumption expected to rise to 8% by 2030 according to International Energy Agency), datacentres need high-capacity stable and reliable power sources. Traditional power purchase agreements connecting to the existing grid are the obvious choice, unless the power grid capacity is already overstretched so as to cause power intermittency for both datacentres and local residents. 

Where such overstretch conditions develop, datacentre operators often rely on autonomous back-up power sources. Diesel generators, while being a readily available solution, may run afoul of emissions targets set by law (with Washington Clean Energy Transformation Act, California 100 Percent Clean Energy Act, the EU Climate Law and the UK Climate Change Act being examples) and the datacentre industry itself (as exemplified by the European Climate Neutral Data Centre Pact to make all datacentres in Europe carbon-neutral by 2030, as well as similar unilateral commitments by many hyperscalers). Projects to equip datacentres with autonomous renewable energy sources can improve utilisation rates, generate costs savings and attract tenants. We expect datacentres to be willing buyers of improved clean energy technologies, such as high-capacity batteries reducing the intermittency inherent in solar and wind power, thermal power generation and hydrogen fuel cells. 

Sophisticated hyperscale operators may seek symbiotic strategic alliances with renewable energy producers, such as the long-term agreements recently entered into by AES Corporation with Alphabet and Microsoft. Under these agreements, money and knowledge flow both ways: an energy producer supplies the necessary power, while a technology company operating a datacentre provides data processing capabilities to assist the power provider to innovate in such production. 

Focus on efficiency

Increasing energy supply is only one part of the datacentres’ energy equation; optimizing efficiency in energy use is the other. Cooling accounts for approximately 40% of datacentre energy consumption, and its proportion is expected to grow as the datacentres employ more processing power in a smaller space. As a result, datacentres may require capital expenditure to redesign their cooling systems and to move away from traditional air cooling to more efficient technologies, such as immersion cooling (immersing heat-emitting elements in liquid) or cold plate cooling (connecting heat-emitting elements to a solid thermal conductor). To accommodate such new technologies, further investment will likely be required in related fields such as equipment and server design.

As a counterpart to alliances with energy producers, datacentres are expected to increasingly seek waste heat recovery solutions for use by third party consumers, whether residential (as is most prominent in Northern Europe, with 10% of Stockholm’s heating expected to come from data parks by 2035) or commercial (as exemplified by use of neighboring third-party waste heat in Amazon’s Seattle campus). We expect that the sale of waste heat will be an increasing source of revenue for datacentres, particularly those located in or near population centres.

As the economy becomes increasingly data-centric, datacentres represent a variety of opportunities for deployment of cutting-edge technologies and capital investment at all stages of their existence.



Dino Barajas, partner,

Jonathan Gordon, partner,

Neil Torpey, partner,

Nicole Perez, partner,

Stuart Blythe, partner,

Nikolai Gryzunov, associate,