Akamai Down 57% Lets IBM Vie With Verizon for Takeover: Real M&A

Akamai Technologies Inc. (AKAM) may finally be cheap enough to lure International Business Machines Corp. (IBM) or Verizon Communications Inc. (VZ) as the most speculated U.S. takeover target since 2005 approaches its lowest valuation on record.

Worth as much as $9.9 billion last year, the shares have plunged 57 percent in the past 12 months for the third-biggest drop in the Nasdaq 100 Index, giving it a market value of $3.8 billion. Akamai is valued at 7.6 times earnings before interest, taxes, depreciation and amortization, almost two-thirds less than a year ago and near a 2008 record low. It’s more affordable than 94 percent of the largest U.S. Internet software companies, according to data compiled by Bloomberg.

Akamai may now attract acquisition interest from IBM, which is hunting for takeovers, and Verizon, owner of the largest U.S. wireless operator, said Blaylock Robert Van LLC and SunTrust Robinson Humphrey Inc. While earnings forecasts that missed analysts’ estimates and price cuts triggered Akamai’s drop, the Cambridge, Massachusetts-based company is still projected to have record revenue in 2011 and a fifth straight profit gain as increasing Internet traffic buoys demand for the provider of server space that helps websites load faster.

“It’s a no-brainer for someone like IBM who wants a very dynamic, global, mission-critical content distribution network,” Joel Achramowicz, an analyst at investment bank Blaylock Robert Van, said in a telephone interview from Oakland, California. “It represents a very compelling acquisition target.”

Buyout Rumors

Jeff Young, a spokesman for Akamai, declined to comment on whether the company had been approached by IBM or Verizon about an acquisition. Michael Fay, a spokesman for IBM, and Robert Varettoni, a spokesman for Verizon, said the companies don’t comment on rumors and speculation.

Akamai, which supplies the computer power that speeds delivery of content for customers including Apple Inc. (AAPL) and Netflix Inc., was the subject of more buyout rumors than any other American company from 2005 through 2010, data compiled by Bloomberg show. It was named as a target 21 times by electronic news services, brokerages or newspapers, the data show.

“We don’t see any need to be bought,” Tom Leighton, Akamai’s co-founder and chief scientist, said in an interview yesterday at Bloomberg’s New York headquarters. “Akamai is very attractive. We’re very unique in what we do. We’d be of interest to any big player that cares about the Internet.”

Instead, Akamai may be an acquirer as it looks to use its cash for potential takeovers, Leighton said.

Intelligent, Clever, Cool

Akamai, whose name means intelligent, clever and cool in Hawaiian, was co-founded by Leighton, a former Massachusetts Institute of Technology professor, and Daniel Lewin, a former graduate student at the school. The two were trying to meet a 1995 challenge by MIT colleague and World Wide Web pioneer Tim Berners-Lee to find better ways to deliver Internet content to users. Lewin died aboard one of the two hijacked planes that crashed into the World Trade Center during the Sept. 11 terrorist attacks.

Akamai was formed in 1998 and sold shares to the public in 1999. After the Internet bubble burst, deal speculation coupled with a more than fourfold increase in revenue since 2004 drove Akamai’s Ebitda multiple to 21 times a year ago, data compiled by Bloomberg show.

Akamai’s stock plummeted 57 percent in the last 12 months through yesterday. The company was forced to keep up with price cuts from competitors such as Limelight Networks Inc. (LLNW) and Level 3 Communications Inc. (LVLT) and sales from advanced services like cloud-computer security failed to make up for the lost profits. That reduced its market value to $3.8 billion as of yesterday after reaching a 10-year high of $9.9 billion on Dec. 7.

Internet Usage ‘Explosion’

“It sure makes a lot of sense for Akamai to be acquired, more sense than at the beginning of the year,” Aaron Schwartz, a New York-based analyst at Jefferies & Co., said in a phone interview.

Akamai rose 8.7 percent to $22.35 today for the fourth- biggest gain the in the Nasdaq 100.

Valued at 7.6 times Ebitda as of yesterday’s close, the company is approaching its record low of 4.9 times set in November 2008. That makes it cheaper than 15 of 16 U.S. Internet software and services companies with market values greater than $1 billion, data compiled by Bloomberg show.

Internet Traffic

“While the stock is down here, it wouldn’t be very surprising if somebody looked at them as a possible acquisition,” Scott Tapley, who helps oversee $2.5 billion at 1st Source Investment Advisors Inc. in South Bend, Indiana, said in a phone interview. “The thesis behind their existence -- the explosion of bandwidth consumption -- is playing out in spades.”

Internet traffic will quadruple by 2015 to almost a zettabyte, driven by growth in smartphones, tablet computers and appliances connected to the Web, Cisco Systems Inc. (CSCO) said in its fifth annual Visual Networking Index report in June. More consumers watching videos and accessing the Web on mobile devices will strain service providers’ abilities to transmit data quickly, said Cisco, the largest maker of networking equipment. A zettabyte is equal to a trillion gigabytes.

An Akamai competitor such as Limelight, the $241 million company based in Tempe, Arizona, may be acquired first because it is “bite-size” and Goldman Sachs Group Inc. (GS) owns 27 percent, Donna Jaegers, a Denver-based analyst at DA Davidson & Co., said in a phone interview.

Record Revenue

Akamai is projected to post a 13 percent gain in 2011 net income to $194 million, a fifth consecutive increase, according to analysts’ estimates compiled by Bloomberg. Analysts also project that sales will reach an all-time high of $1.14 billion this year and $1.28 billion next year.

The company may not be willing to sell for less than $40 a share, which would be a 95 percent premium to yesterday’s closing price of $20.56, Rodney Ratliff, a Memphis, Tennessee- based analyst at SunTrust Robinson, said in a phone interview.

IBM is planning more acquisitions to fuel growth in its $22.5 billion software business, Senior Vice President Steve Mills said in an interview. The Armonk, New York-based company, which last week surpassed Microsoft Corp. to become the world’s second-most valuable technology company after Apple, said it may spend $100 million to $300 million on targets.

“IBM has made a lot of software acquisitions, it’s a player in the cloud and it’s looking to increase that exposure to the cloud,” DA Davidson’s Jaegers said. “They also have a resale agreement with Akamai. You would expect anybody who has a resale agreement with Akamai to think about maybe buying it since they’ve already been test-driving the product.”

Verizon as Buyer

A telecommunications company, such as New York-based Verizon Communications, could buy Akamai to be able to charge a premium price for guaranteed Internet content delivery at better performance rates on mobile phones, said Jefferies’ Schwartz. Verizon Communications, the second-largest U.S. phone company, is the majority owner of Verizon Wireless, the No. 1 U.S. mobile operator.

“On the telco side, the one that would make the most sense would be Verizon,” SunTrust Robinson’s Ratliff said. “Verizon is a big Akamai reseller.”

Akamai is now “an even more attractive acquisition target” than it was earlier this year, Ratliff said.

“The market can’t stay this depressed forever,” he said. “At the end of the day, it’s much more likely that you ultimately will see Akamai taken out.”

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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