Well, the rumors turned into reality this time, as this mornings headlines have Akamai (NASDAQ:AKAM, news, filings) signing a definitive agreement to buy upstart competitor cotendo. Talk of such a deal started bubbling up after Thanksgiving, and there were solid strategic reasons behind the combination. But the rumored price tag overshot the mark slightly, as Akamai will be paying $268M net cash to make the deal happen. That’s still a nice payday for Cotendo’s backers, who put in rather less than $40M by my count.
Cotendo has been driving innovation at the high end of the CDN marketplace with its integrated web and mobile acceleration services. Back in April they introduced Cloudlets, which allowed customers to push not only content to the edge but also custom code execution. Then in June they raised an additional $17M as they unveiled a mobile-focused suite that was built from the ground up.
For its part, Akamai has been working doggedly to tranform its business into a cloud-based managed services company that also happens to run the largest content delivery network. Commoditization at the lower end of the CDN space had made a move up the food chain a necessity as competition had cut into the company’s growth. But challenges from the likes of Cotendo at the high end of the market were squeezing things more than a little bit. Acquiring the source of that competition clears things up a bit, and brings in their customer and partner list – especially that big AT&T relationship.
The deal is expected to close in the first half of 2012. By the time it does, it could be that we have more consolidation to talk about in the CDN world. Certainly Limelight Networks (NASDAQ:LLNW, news, filings) is still trying to figure out what path to take. The rumored talks between them and Level 3 Communications (NYSE:LVLT, news, filings) will no doubt become even more rumored over the next few weeks.
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Categories: Content Distribution · Mergers and Acquisitions
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Rob –
What is your gut on a potential LLNW acquisition by LVLT or others? I think it will happen at some point, but from what I’ve heard the problem is that the premium they’d get on the stock price would never get back to that ~$15ish level where the execs would make $$. My guess is LVLT has offered around $7 – which is a nice premium – but LLNW will never consider anything under $10. Thoughts?
I think you’ve summarized well the reason why there hasn’t yet been a deal. Future developments may change each’s opinion of the value, but until then I’m not sure we see movement.
L3 has talked about not doing anything until GX is well in hand which would likely another year out.
The thing that doesn’t fit in the LL/L3 mosaic is the LL VAS division. That segment is now a large portion of the company(~35% of revs) and analysts have been told by LL that think it is worth 4x revs.
If Goldman would be willing to sell just the CDN an an industry multiple 1.5-1.75x I think L3 is interested by why pay that high multiple for something so non-core as Value-Added-Services. There would either need to be another DG like transaction for the VAS that predates any LL acquisition or a joint bid btw L3 and someone else. That is a long winded way of saying that at some price L3 is interested though there is hair and it all makes anything near $7 seem like a stretch.
I tend to agree personally, which is why I have always been ambivalent about the LVLT/LLNW combination from LVLT’s perspective. But stranger things have happened.
So, Akamai is paying $268MM net cash at a higher elevation inside cdn clouds, for how much in annual sales predicated upon AT&T being their main customer?
This is occurring while their legacy CDN business is basically in run off mode as a result of not owning fiber.
Only Wall Street and their minion can make up these over valuations.
I see Netflix got content distribution rights for the BBC this morning to expand in England and Ireland, while VZ says they didn’t have interest in purchasing them.
Who does this help on the REVENUE side of the COIN?
Flip it and see where it lands!
They’re not buying Cotendo for the revenues or EBITDA. They’re buying Cotendo to further their move up the food chain by eating the competition.
@Rob … Correct. The technology that contendo developed is far more “sticky” and therefore provides Akamai with greater functionality. Though one must give the contendo folks props for their great performance …. Startup and raising a boatload of cash to the eventual sale for a premium. I estimate each founder is walking away with 20M to 30M. Not bad for three to four years. Merry Xmas.
Rob, Forgive my ignorance, but why would AT&T (largest network, POP and DC operator in the world?) need a CDN? What if they simply terminate the contract or let it term out?
To put it simply, in order to properly scale the backhaul network – both for mobile and fixed – one needs CDN capabilities in some form. Additionally, so many enterprises need CDN in some form that AT&T needs to have it in their portfolio to address its customers needs, even if it’s not in-house.