Akamai Eyes Cotendo Acquisition

Reportedly, Akamai Technologies Inc. ( AKAM - Analyst Report ) is in talks to buy Cotendo, a content delivery network and application delivery network provider. Akamai is supposedly paying in the range of $300 million to $350 million for the company.

Cotendo has its headquarters in Sunnyvale, California, with a research and development facility in Netanya, Israel. Cotendo caters to 300 customers including telecommunications vendors, e-commerce sites, social networks, and advertising networks. Some of the clientele includes Facebook, Zynga, MyYearBook, Microsoft Corp. ( MSFT - Analyst Report ) and Google Inc. ( GOOG - Analyst Report ) .

Cotendo’s expertise not only include the acceleration of services for dynamic Web apps, static and dynamic web content, performance administering and automatic failover, but also real-time reporting and analytics. The company is expected to generate $20 million to $30 million in sales in 2011. Moreover, a certain distribution agreement with AT&T Inc. ( T - Analyst Report ) is expected to garner another $30 million in revenues in the next four years. This would be incremental to Akamai’s top-line going forward.

Akamai already controls nearly 60.0% of the content management and streaming market. Cotendo and others control the remaining share. On that note, following this acquisition, Akamai will control a larger share of the content management and streaming market.

Moreover, Akamai is set to expand its presence in Central and Eastern Europe (CEE). The company will extend its services to five countries in the region, namely the Czech Republic, Hungary, Poland, Romania and Slovakia. Akamai will also open a branch office in Krakow, Poland to support its CEE customers. Akamai is expected to benefit from the huge demand in the region. According to research firm Forrester, the CEE region is estimated to reach overall Internet adoption rates of 54% by 2013.

Akamai is also trying to strengthen its existing channel partner program in order to support different verticals such as enterprise, commerce, financial services, high-tech, manufacturing and media markets in CEE going forward. We believe that this acquisition will help Akamai take significant market share in the region, as it will enjoy a first-mover advantage. Moreover, diversified operations will also boost top-line growth in our view.

Akamai sued Cotendo for violating its patents in November 2010. Interestingly, this is not the first time that the company acquired a company that it had earlier sued for patent violation. In fact, the last two companies that Akamai acquired were ones that it had sued earlier (Digital Island and Speedera).

Recommendation

We maintain our Neutral recommendation on Akamai over the long term (6-12 months) due to higher capital expenditure and increasing competition from companies, such as Level 3 Communications Inc. ( LVLT - Snapshot Report ) and Limelight Networks Inc. ( LLNW - Snapshot Report ) . Moreover, Akamai is also seeing a good bit of competition from companies like CDNetworks that are using new technologies in the media vertical. The resultant increase in pricing pressure is a concern, since the media vertical contributes a significant portion of Akamai’s revenue. Amazon‘s entry into the digital audio and video streaming business is an added risk.

However, we believe that the increasing use of cloud computing technology, higher adoption of value-added solutions, aggressive share repurchase, strategic partnerships, acquisitions and growth of online video are positives for the stock over the long term.

Currently, Akamai has a Zacks #3 Rank, which implies a ‘Hold’ rating on a short-term basis.