Akamai could benefit from buying smaller rival

Increasing competition in its core business has forced the company to offer value-add services to augment its product portfolio and protect margins.

By Trefis Nov 30, 2011 3:11PM
Akamai (AKAM) may be planning to buy software company Cotendo for more than $300 million, according to a report published in the Calcalist Financial daily Sunday.

Cotendo, a smaller Israeli rival which competes with Akamai for value-added services, was founded in 2008 and launched in March of last year. The company has raised more than $36 million in funding from Sequoia Capital, Benchmark Capital and other investors, and also has the backing of strategic partners such as Citrix, Juniper (JNPR), Google (GOOG) and AT&T (T).

The private company has an impressive list of customers that use its site acceleration and application acceleration services, including some big names such as AT&T, Facebook and Zynga.

Akamai shares rose nearly 5% Wednesday to trade at $29 in the afternoon. Our price estimate for the stock is $31, about 7% higher than the market price.


See our complete analysis for Akamai stock here


Acquisition will help margins


Akamai had been the sole player in the content delivery market for many years beforeLimelight Networks (LLNW), InterNAP Network Services (INAP) and Level 3 (LVLT) started offering services at cheaper rates. Aggressive pricing saw prices decline in the Content Delivery Network (CDN) market, which has taken a toll on Akamai's margins. Its gross margins declined by a full percentage point this quarter, in spite of an increase in revenue.


Increasing competition in its core business has forced Akamai to diversify by offering value-add services to augment its product portfolio and protect margins. Akamai's value-added offerings have grown to account for almost 50% of the company's revenues in the absence of any other major player in the industry. (See Akamai Facing New Challenges in Value-Added Services.)


However, the emergence of new players in this rarefied market segment such as Cotendo threatened to pressure Akamai's margins, a roadblock Akamai hopes to eliminate with this acquisition.


Akamai Online Shopping Business Gross Margin

That Akamai recognized the increasing threat from Cotendo became apparent after it sued Cotendo for patent infringement last year. It had sued competitors Digital Island and Speedera before going on to acquire them as well.


ARPU will also increase


Aside from decreasing pricing pressures, the acquisition would also allow Akamai to strengthen its value-added portfolio and help it gain share within the broader CDN market. Having a strong service portfolio to augment its core CDN business will allow it to price its combined services at higher price points and the company may see an increase in its average revenues per customer (ARPU) over time.


Cotendo priced its value-add services much cheaper than Akamai, but with a decrease in competition after the acquisition, Akamai may not want to renew Cotendo's existing contracts at those cheaper rates.


Akamai Revenue per Online Shopping Business Customer
  The deal will also help Akamai gain instant access to Cotendo's very impressive list of customers. The company managed to sign about 400 customers in fewer than 20 months since its launch, which is a testimony to its strong customer-centric service offering that could benefit Akamai in the event of a take over.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
266
266 rated 2
452
452 rated 3
702
702 rated 4
671
671 rated 5
604
604 rated 6
640
640 rated 7
495
495 rated 8
267
267 rated 9
158
158 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ABBVABBVIE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
LUVSOUTHWEST AIRLINES CO.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.