Akamai Technologies Makes Strategic Purchase of Cotendo

Network services operator Akamai improves its market presence and enhances its Web acceleration technology with the $268 million cash purchase of startup competitor Cotendo.

Akamai Technologies, which has made its name providing content delivery networks designed to boost Web performance for high-bandwidth uses such as video and big data, is looking to expand its market share with the purchase of competitor Cotendo.

The $268 million cash purchase is Akamai's second largest after the $2.19 billion acquisition of InterVU in 2000, according to data compiled by Bloomberg. Akamai has a market value of $5.68 billion and about 2,300 employees. It has declined 33 percent this year.

The deal helps Akamai "maintain its leadership position and high margins" by eliminating a competitor, according to a research note from Gray Powell, an analyst at Wells Fargo & Co. in New York. Akamai is paying about nine times Cotendo's anticipated 2011 revenue of $30 million, according to Powell. The ratio makes the deal "expensive but worth it," he said. The purchase price is less than the $300 million some investors had expected three weeks ago, said Powell, who rates the stock "outperform."

Founded in 2008, Cotendo is headquartered in Sunnyvale, Calif. More than half of its 100 employees are based in Israel, where the company maintains an engineering facility. Juniper Networks and AT&T had also reportedly been in the market to buy out Cotendo. Both are strategic partners of the firm, which has raised about $39 million from California venture capital firms Benchmark Capital, Sequoia Capital and Tenaya Capital. Juniper is a strategic investor, as is Citrix Systems.

Cotendo's founders are CEO Ronni Zehavi, research chief Udi Turgeman and tech chief David Drai, all former executives at Commtouch Software.

"As we look to accelerate growth across the dynamic landscapes of cloud and mobile optimization, we are excited to be joining forces with Cotendo," said Paul Sagan, president and CEO of Akamai. "Cotendo's technology, partnerships and people are a strong complement to Akamai. Together, we believe there is tremendous opportunity for our combined technologies as enterprises embrace the move to the cloud and seek solutions for an increasingly mobile world."

"The Cotendo team is very proud of our accomplishments in delivering proven and effective solutions for accelerating Web and mobile assets," said Zehavi. "By combining our innovative technology and employees with Akamai, we expect our customers and partners will gain access to a comprehensive, global platform and wider portfolio of leading-edge services supported by some of the most experienced providers in the industry. We look forward to working with Akamai in an effort to create the strongest offering in the industry."

Under terms of the agreement, Akamai will acquire all of the outstanding equity of Cotendo in exchange for a net cash payment of approximately $268 million, after expected purchase price adjustments, plus the assumption of outstanding unvested options to purchase Cotendo common stock. The closing of the transaction, which is subject to customary closing conditions, including regulatory approvals, is expected to occur in the first half of 2012.

At least one analyst believes the deal is bad for the industry and customers.

"While this acquisition is great for Akamai and their business, it's bad for the industry and for customers as a whole," said Dan Rayburn, principal analyst at Frost & Sullivan, in a blog post.

Rayburn backed that assessment:

"Competition is a good thing because it makes companies innovate faster, helps foster quicker adoption of technology, drives pricing down in the market and with more companies selling the same service, it creates awareness in the market. With Akamai taking out Cotendo, they have locked up the market for app acceleration and mobile acceleration and are the clear leader, in terms of revenue, for DSA offerings. That's not to say that others won't compete over time (Amazon will), but Cotendo was really the only company that was getting some good traction in the market for these services, had some real revenue and customers to show for it and was putting pressure on Akamai."