Akamai (AKAM) shares were among the top gainers this week, trading up 18% after it announced it would acquire privately held Cotendo (press release).
The Cloud Is Hot
This proposed acquisition is not the first one in the "hot" cloud space. Earlier, IBM (IBM) and software-giant Oracle (ORCL) acquired smaller cloud-based companies. Even this month,German-based SAP (SAP) bought SuccessFactors for $3.2bn (link).
Under the proposed deal Akamai will pay $268 million for the just three-year old privately held company. Its initial investors, including the famous Sequoia Technology Fund, which participated in initial financing rounds, stand to make good returns.
Cotendo
Only founded in 2008, Cotendo employs about 100 employees and is equally split between Israel and California. Cotendo offers integrated web and mobile services which are complementary to Akamai's existing platform assets to provide a complete solution for enterprises embracing cloud-based strategies in a rapid pace.
Akamai
Growing at double-digit rates Akamai has had a good run in the last five years. Revenues surpassed the annual $1 billion mark last year on which it made $170 million in profit with roughly 2,300 employees. It has no debt and could easily finance the acquisition with over $600 million in cash in the bank.
Shares have been hammered this year, falling all the way from $50 at the start to lows of $20 in the autumn as profit margins were under pressure and the company was forced to issue a profit warning.
Strategic Fit
The acquisition makes perfect strategic sense. The deal valued at an estimated 6 times annual revenue implies a multiple which is in line with Akamai's own valuation.
Investors are relieved that Akamai finally decided to acquire a rapidly growing competitor (Cotendo was already eating into Akamai's high margins this year). Investors are cheering today and pushed the market valuation up by $1 billion, a sign of relief when a business is acquiring a competitor for just a fraction of that amount.
Investors acquiring Akamai's shares at these levels are betting that the acquisition will start to turn around the margin decline which hammered Akamai's stock this year. On a personal level, I think the rally is overdone for the short term. In the long run it is a fine addition to the business model.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
