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Merger activity signals Telco & Cable Companies interests in Cloud Computing May 19, 2011

Posted by TelUS Consulting Services in Data Networking catagory.

In the battle for enterprise customers, the country’s giant telecommunications and cable companies are going to the cloud.

CenturyLink, the nation’s third-largest telecommunications company, announced plans to buy Savvis, a data center services business, for $2.5 billion. Under the deal, CenturyLink will assume $700 million in debt and pay Savvis shareholders $40 a share, 11 percent above the stock’s closing price on Tuesday.

It’s a play on the boom in so-called cloud computing — the practice of using the Internet to process, manage and store data on remote network servers. It also signals an industry trend back to centralized data centers much like the days of the main frame.

As more companies shift away from on-site computer servers, demand is rising for companies like Savvis that provide hosting and data center services. Since the start of the year, several major telecommunications and cable companies have hungrily snapped up these sorts of businesses.

In January, Verizon Communications announced it’s purchase of Terremark, a provider of data storage services for large enterprises, for $1.4 billion. A month later, Time Warner Cable, the nation’s second-largest cable company, acquired Navisite, another business hosting service, for $230 million. In both deals, the acquirers agreed to pay over 30 percent more than the 30-day average prices of the two stocks.

And it is not just older communications companies fishing for cloud computing acquisitions. Data storage players have also attracted the more traditional technology giants. Hewlett-Packard, EMC and Dell have all signed multibillion dollar deals in the last 12 months.

Part of the reason companies are making these acquisitions is to find new growth engines as their traditional business segments slow. Residential markets are becoming increasingly saturated with cable installations. Traditional telecommunications companies are facing more landline disconnections as cable steps up its broadband presence.

CenturyLink, based in Monroe, La., is best known for providing voice and broadband services to rural homes across the United States. In the last year, it has pushed aggressively to expand its business, notably announcing the $10.6 billion purchase of Qwest Communications in April 2010. For CenturyLink, Qwest offered significant infrastructure, a sprawling fiber optic network, 17 data centers and a growing enterprise business. The acquisition of Savvis, with its deep portfolio of hosting solutions for businesses, will significantly expand those offerings. Last year, revenue rose 7 percent at Savvis, to $933.0 million.

Data center services companies are also becoming more attractive as businesses change the way they make their information technology purchasing decisions. With voice, broadband and wireless — and now hosting — services, traditional telco’s will be able to offer its enterprise customers more robust, bundled packages.

As the pressure to consolidate grows, analysts say, more deals are likely this year. In the sector, there are several private and public companies ripe for takeover including Rackspace Hosting, Joyent, GoGrid, SoftLayer and Internap. Of this group, Rackspace is the largest, with a market capitalization of $5.92 billion. Shares of Rackspace rose 4.2 percent on Wednesday to close at $45.80. Because of its size, the pool of eligible bidders for Rackspace is limited however it might be attractive to large companies like H.P., I.B.M., Dell or Microsoft, which could pay a premium for its strong portfolio of support services.

As the business community rushes headlong into the bandwidth consumption frenzy, one key future factor may be metered bandwidth efforts by the telco’s and MSO. If this trend continues it may even affect their investments in cloud computing as business once again balances the cost justifications of moving data to a cloud and paying for bandwidth, vs. managing internal data centers without the external bandwidth requirements. If I remember, this and the falling cost of desktop computing power were the driving forces behind the first industry move away from mainframes and centralized data centers. Stay tuned, move on this as merger mania continues.

Joe Buck, NCE

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