Are Data Centers a Thing of the Past?

SAP AG

that it will acquire cloud software maker SuccessFactors

for $3.4 billion in cash, a major move that puts the dominant maker of business applications squarely into cloud computing. It is a transaction that may signal more acquisitions of this type to come as traditional software and business service companies strive to remain relevant and innovative by acquisition. Many cloud-based companies saw bullish action after this blockbuster acquisition. Some of these companies included: Taleo Corporation

, Ariba

, Concur Technologies

, and Saba Software

. All of these companies traded over 15% higher, as investors believe that cloud-computing companies could be ripe for the picking. Within the past handful of years, many corporations would outsource its internal networking systems to data center providers. Companies that are in the Data Center Industry build out, develop, manage, and store in-house networks and servers for corporations. Digital Realty Trust (NYSE DLR) and DuPont Fabros

are companies that own, acquire, develop and operate wholesale data centers realty for major corporations. Other companies like Equinix

and Rackspace

connect businesses with partners and customers globally through a global platform of data centers, containing ecosystems and a range of networks. With the SuccessFactors acquisition, it seems as though major corporations see more demand is accumulating in cloud-based networks rather than in-house data centers. This blockbuster acquisition could be a potential red flag for companies specializing in developing in-house data centers, like Digital Realty Trust, Equinix, and Rackspace. However, major corporations find value in this as they can be connected faster to other major corporations. For example, it is more efficient for trading firms like branches of Goldman Sachs

and Morgan Stanley (NYSE MS) to be connected to the same ecosystem like the New York Stock Exchange or the Chicago Mercantile Exchange as these trading firms can capitalize faster on arbitrage opportunities. This is because trades from the firms can be executed faster as they are connected right to the exchange. The software companies specializing in cloud-computing saw much strength on Monday, as most were up over 10%. Companies specializing in data centers were up only modestly, mostly in-line with the overall market. Equinix traded about 2% higher, and Digital Realty Trust traded up nearly 2%, as the Nasdaq was about 1.25% positive on the session.

Bearish

If you think data center providers and managers are still a major part of the networking industry and the SuccessFactors acquisition is overdone; consider:

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