Reportedly,
Akamai Technologies Inc.
(
AKAM
) is in talks to buy Cotendo, a content delivery network and
application delivery network provider. Akamai is supposedly paying
in the range of $300 million to $350 million for the company.
Cotendo has its headquarters in Sunnyvale, California, with a
research and development facility in Netanya, Israel. Cotendo
caters to 300 customers including telecommunications vendors,
e-commerce sites, social networks, and advertising networks. Some
of the clientele includes Facebook, Zynga, MyYearBook,
Microsoft Corp.
(
MSFT
) and
Google Inc.
(
GOOG
).
Cotendo's expertise not only include the acceleration of
services for dynamic Web apps, static and dynamic web content,
performance administering and automatic failover, but also
real-time reporting and analytics. The company is expected to
generate $20 million to $30 million in sales in 2011. Moreover, a
certain distribution agreement with
AT&T Inc.
(
T
) is expected to garner another $30 million in revenues in the next
four years. This would be incremental to Akamai's top-line going
forward.
Akamai already controls nearly 60.0% of the content management
and streaming market. Cotendo and others control the remaining
share. On that note, following this acquisition, Akamai will
control a larger share of the content management and streaming
market.
Moreover, Akamai is set to expand its presence in Central and
Eastern Europe (
CEE
). The company will extend its services to five countries in the
region, namely the Czech Republic, Hungary, Poland, Romania and
Slovakia. Akamai will also open a branch office in Krakow, Poland
to support its CEE customers. Akamai is expected to benefit from
the huge demand in the region. According to research firm
Forrester, the CEE region is estimated to reach overall Internet
adoption rates of 54% by 2013.
Akamai is also trying to strengthen its existing channel partner
program in order to support different verticals such as enterprise,
commerce, financial services, high-tech, manufacturing and media
markets in CEE going forward. We believe that this acquisition will
help Akamai take significant market share in the region, as it will
enjoy a first-mover advantage. Moreover, diversified operations
will also boost top-line growth in our view.
Akamai sued Cotendo for violating its patents in November 2010.
Interestingly, this is not the first time that the company acquired
a company that it had earlier sued for patent violation. In fact,
the last two companies that Akamai acquired were ones that it had
sued earlier (Digital Island and Speedera).
Recommendation
We maintain our Neutral recommendation on Akamai over the long
term (6-12 months) due to higher capital expenditure and increasing
competition from companies, such as
Level 3 Communications Inc.
(
LVLT
) and
Limelight Networks Inc.
(
LLNW
). Moreover, Akamai is also seeing a good bit of competition from
companies like CDNetworks that are using new technologies in the
media vertical. The resultant increase in pricing pressure is a
concern, since the media vertical contributes a significant portion
of Akamai's revenue. Amazon's entry into the digital audio and
video streaming business is an added risk.
However, we believe that the increasing use of cloud computing
technology, higher adoption of value-added solutions, aggressive
share repurchase, strategic partnerships, acquisitions and growth
of online video are positives for the stock over the long term.
Currently, Akamai has a Zacks #3 Rank, which implies a 'Hold'
rating on a short-term basis.
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