Alpha Found: VitalStream Acquired by Internap

Includes: INAP, VSTH
by: Davis Freeberg

Earlier this week I wrote about VitalStream (VSTH) and how I thought that the company could be a diamond in the rough. With a healthy portfolio of streaming on demand customers and a balance sheet of $50 million, they were in a good position to take advantage of the growing popularity of VOD technology.

After seeing their stock sell off on the loss of their MySpace account, a rare value play in the VOD market presented itself. Just as quickly though that value window closed when Internap (NASDAQ:INAP) announced Thursday morning that they intend to purchase the company for $217 million in a stock.

Investors in VitalStream will receive approximately a half a share of Internap in exchange for each share of VitalStream that they hold (VTSH stock jumped about 20% on the news). The deal is expected to close in the first quarter of 2007 and should be an excellent compliment to Internap’s existing 38 data centers that they currently run.

Internap provides VOIP, VOD and hosting services for a number of large corporate customers and with the acquisition of VitalStream, it marks a bold commitment to video on demand technology. While VOD is still a young industry and there is certain to be a lot of turmoil in the industry as the market develops, at first glance, this seems like a smart move by Internap and should help to make the company a significant competitor in the VOD market. With Internap’s VOIP technology and their existing hosting solutions, both companies should benefit from the synergies formed by combining the two companies.