Verizon Closes Terremark Deal

Verizon Communications (VZ - Analyst Report) has completed its pending $1.4 billion acquisition of Terremark Worldwide Inc. (TMRK), an information technology (IT) service company. The acquisition gives the second largest U.S. phone company a 96.6% stake in Terremark. It also makes Verizon a cloud service provider.

The Verizon-Terremark deal was announced back in January through a tender offer. In early April, Verizon concluded its tender offer for $1.1 billion by purchasing 59.8 million Terremark shares for $19 per share in cash. The remaining shares, which were not tendered, were converted into cash for $19 per share. Now, Terremark will operate as a wholly owned subsidiary of Verizon.

Verizon has positioned itself for growth in cloud services over the year. The company seeks to expand its business to offset declining revenues from traditional fixed lines. The company reported weak revenues from its wireline business in fourth quarter 2010 due to continued declines across global wholesale and enterprise businesses.

Telecommunication carriers are rapidly entering the cloud computing business due to increased competition and changing consumer habits. This will help operators to differentiate their products and services and pave the way for strategic alliances between telecom and IT companies. Telecom operators will be able to provide competitive offerings with bundled services. 

The transaction with Terremark supports Verizon growth initiative in remote or cloud computing, an area where it has been lagging competitors like AT&T Inc. (T - Analyst Report). The acquisition provides a combination of cloud, colocation and managed hosted services to Verizon.

We believe Verizon’s continued investments in its broadband network,strong wireless and FiOS services, cloud computing business, share gain in the retail post-paid market along with increasing smartphones penetration and other data devices will make the stock attractive for the long term.

Further, the fourth-generation Long-Term Evolution (4G LTE) network and Apple Inc.’s (AAPL - Analyst Report) iPhone sales will boost the company’s future growth prospects. However, persistent erosion in access lines, high promotional and restructuring expenses, and intense competition from cable companies and other alternative services providers may threaten the stock.

We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.

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