Akamai’s Cotendo deal a win

Investors are happy with the acquisition, which eliminates a key rival and helps Akamai gain control of important technology.

By Trefis Dec 27, 2011 1:06PM
Akamai (AKAM) said Thursday that it has reached an agreement to buy out Cotendo for a net cash payment of approximately $268 million.

The move eliminates a key rival for Akamai in value-added services and also helps the company gain access to Cotendo's mobile acceleration technology. Founded in 2008 and backed by strategic partners such as Citrix, Juniper (JNPR), Google (GOOG) and AT&T (T), Cotendo has an impressive list of customers, including big names such as AT&T, Facebook and Zynga (ZNGA), that use its dynamic site acceleration (DSA) and application acceleration services.

The news was well-received by investors. Akamai's shares rose almost 20% following the news, and it held on to most of its gains to close at $31.63. The stock traded for $32.27 Tuesday morning. Our price estimate for Akamai is $31.74, in line with the market's current bullish sentiment.


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 before other Content Delivery Networks (CDN) such as Limelight Networks (LLNW) and Level 3 (LVLT) started offering services at cheaper rates. That shattered Akamai's monopoly and pressurized its margins. Its gross margins declined by a full percentage point last quarter, in spite of an increase in revenue.


Akamai Online Shopping Business Gross Margin
The company has been offering value-added services as a way to differentiate itself from rivals and protect the margins of its core content delivery business. However, we believe the emergence of Cotendo as a key player in this specialized high-margin offering, especially after its deal with AT&T, started to threaten the moat Akamai was building around its CDN business. Acquiring Cotendo will minimize that risk for the time being before other competitors catch on.


With Akamai now controlling a vast market share, it will be able to price its value-added offerings higher and protect its overall margins. Cotendo priced its value-add services much cheaper than Akamai. Now, with lesser competition, Akamai may not want to renew Cotendo's existing contracts at those cheaper rates. (See Akamai's Cotendo deal would add margin upside & growth to current $33 value.)


Akamai Revenue per Online Shopping Business Customer

Cotendo recently added a mobile acceleration suite to its value-added portfolio, a service we see huge potential in and think Akamai also has its eyes on. We expect this service to start being widely used as smartphones see mass adoption and increasingly replace the PC as the primary computing and networking vehicle, making it essential for content providers to provide a solution that speeds up delivery of mobile websites and applications. (see With Cotendo deal, Akamai takes out a competitor & gains mobile acceleration technology)


Needless to add, Akamai will also gain access to Cotendo's impressive clientele that now has few options outside Akamai. So, all in all, we see this as a good move by Akamai.


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.

117
117 rated 1
280
280 rated 2
478
478 rated 3
656
656 rated 4
650
650 rated 5
640
640 rated 6
647
647 rated 7
482
482 rated 8
277
277 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
ITUBITAU UNIBANCO BANCO MULTIPLO S.A.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.