Akamai Buys FactSoft

Akamai Technologies Inc. (AKAM - Analyst Report) has acquired FactSoft Inc., a California-based web content acceleration software provider. Akamai made the acquisition in a bid to strengthen its cloud infrastructure solutions. The financial details of the deal were not disclosed.

FactSoft’s products, such as FastSoft E Series Internet Accelerators and FastSoft E Series EX, help in faster downloading of web content. The company’s solutions also help in the acceleration of desktop virtualization.

The acquisition of FactSoft is expected to enhance Akamai’s efficiency in delivering digital content. Moreover, Akamai can leverage FactSoft’s advanced Transmission Control Protocol (“TCP”) technology for further enhancement of its mobile applications and cloud applications.

Along the same lines, Akamai acquired Cotendo late last year. Cotendo specializes in software and services that improve the delivery of content across the Web and on mobile-device networks.

We believe that these acquisitions will positively impact Akamai’s cloud optimization solutions. Cloud infrastructure solutions contributed approximately 58% of the total revenue in the second quarter of 2012.

According to Gartner, the cloud services market is expected to grow over 3 times by 2015 to $177.0 billion. According to market research firm IDC, spending on public cloud services is expected to increase four times faster than the entire IT market over the next four years, reaching $72.9 billion by 2015. This tremendous growth potential will benefit Akamai, especially in the enterprise segment with the rapid adoption of cloud technologies.

We believe that these acquisitions, along with the cloud initiatives and new products, will help Akamai to achieve its long-term annual revenue target of $5.0 billion. We also believe that the acquisitions will provide a significant competitive edge to Akamai compared to other established content delivery network providers (“CDN”) such as Limelight Networks Inc. (LLNW - Snapshot Report), and Level 3 Communications Inc. (LVLT - Snapshot Report), as well as new entrants CDNetworks, AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report).

Although Akamai has a strong presence in the content delivery market, intense competition has forced it to lower the price of its content delivery network services, particularly the digital media services, which will hurt its margins. Moreover, increasing total bandwidth costs remain a headwind for Akamai.

We maintain our Neutral recommendation on Akamai over the long term (6-12 months). Currently, Akamai has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.