Does Akamai Have XO in Its Sites?

There are heated discussions about the issue of owning the network or not by a pure CDN player like Akamai (AKAM) in the face of the recent downgrade by Goldman Sachs:

Beyond valuation, we are also concerned about intensifying competition as private entrants proliferate and selected large network operators begin to eye the space…

A large CDN without owning networks may in deed lose out like those facility-less CLECs, which all disappeared along with the phasing out of the Unbundled Network Element Platform (UNE-P). At least, with easy reasoning, the lack of its own network support may keep Akamai a niche player and limit its future growth.

Building a national fiber networks takes time and needs expertise. Buying an existing one seems to be more realistic. There are only seven nation wide carriers left after the industrial consolidation, however. Among the seven, the only carrier that fits AKAM's scale and within the reach of its cash hoard and strong stock price is probably XO Communications (XOHO.OB).

However, the big question is whether Carl Icahn – the billionaire investor and XO's Chairman, who also owns 59% of the stock and 90+% of its debts is willing to sell the company at any thing under $2 billion. Considering XO's $1.43 billion revenue and the $108 million EBITDA (improving), plus a minimum $100-300 million recurring saving from business/operation synergy by both companies under this specific merge, the price is not far away from the unconfirmed rumor that LVLT offered $3 billion for XO without success after LVLT paid $1.4 billion in early 2007 for Broadwing – a carrier with about $900 million revenue and near zero EBITDA. This wild guess neither includes XO's $3.3 billion accumulated NOLs (net operating losses), which alone may save the acquirer more than $1 billion in tax payment, nor its wireless business unit - NextLink, which owns the largest LMDS portfolio in the nation. LMDS is a hot commodity currently because it offers a viable vehicle for backhauling of the upcoming 4G mobile communication.

Forget about XO's current stock price, which was down more than 80% during the past year purely caused by the illusive dilution, possibly forced by Carl Icahn at the cost of minority shareholders in a long shot.

Akamai's $6+ billion valuation may look more reasonable with its profit increase and revenue doubled after the imagined merge. There is even a guess that if AKAM announces a merge/acquisition with XO tomorrow, the stock may jump 10-20% like what happened when LVLT announced the Broadwing buy-out.

Disclosure: The author does not have position in AKAM, but is long XOHO.OB.

Comments

[BCNS]

Buying XO would be a bone head move for AKAM. I would sell immediately if they do that. Akamai has a great business that is riding the tidal wave of multimedia content and online applications with a best of breed solution protected by patents and a healthy head start on potential competitors. Better to negotiate a sweet deal with a carrier rather than buying a carrier. I would lose all respect for their management if they were to buy XO.

[User 153814]

You certainly pulled this article out of your ass. Just sell your XOHO, lick your wounds and move on. Buy some AKAM and you'll make some of it back. Please don't push your personal investments here.

[BCNS]

Two carriers consolidating assets and operations (Broadwing and LVLT) makes sense, but running a telecom network is not what Akamai does! Again, they are better off cutting a sweet deal for telecom services rather than buying a carrier. Besides, Akamai is a GLOBAL business and correct me if I am wrong, but I do not believe XO does not have its own facilities around the world (leases facilities). I'd prefer a dividend or the acquisition of an overseas CDN rather than a carrier. I was in Telecom for 20 years, so I know of what I speak.

[Clue-by-Four]

Please. There is absolutely no upside for Akamai to buy XO. Is this just a sad attempt to pump XO?

[tech101]

Google spent hundred million purchasing a surprisingly high amount of black fiber.

Maybe they are stupid, but well, it looks like that the race to bandwidth caps is on.

Perhaps owning a little bandwidth is not a bad idea, even for the unsinkable Akamai.

[tech101]

Google spent hundred million purchasing a surprisingly high amount of dark fiber.

Maybe they are stupid, but well, it looks like that the race to bandwidth caps is on.

Perhaps owning a little bandwidth is not a bad idea, even for the unsinkable Akamai.

[tom2com]

With carriers like Level3 and AT&T targeting the CDN space, it's only a matter of time before the virtual networks ie., Akamai, Limelight, Panther etc. are squeezed. I expect consolidation in the CDN space over the next year or so. The real question is , will CDN's buy carriers for their networks or will carriers buy CDN's for their customer base? I think we will see both. In the long run,owning physical plant is always better than going/staying virtual. Scalability and cost control will be vital in surviving in the CDN space. Owning network accomplishes both.

Tech101 makes an intriguing point