Will the cloud make more rain for deal makers?
The market's response to that question looks mixed after Verizon Communications announced its nearly $2 billion acquisition of Terremark Worldwide.
Companies outsource their computing needs to Terremark's remote data centers, the "cloud" in tech talk, while paying for additional services. Shares of rivals Rackspace Hosting and Savvis are up 4% and 17%, respectively, since last week's deal, struck at a 35% premium. Yet the two others still could be appealing targets, given the scarcity of fast-expanding cloud companies.
Verizon and Terremark are a unique fit, notes Raymond James analyst Frank Louthan. Both work extensively with the federal government, and Terremark also has a significant presence in South America, where Verizon is looking to expand. Rival AT&T, which already does good business selling cloud services, seems an unlikely acquirer in the area.
But other buyers could emerge. Dell might have interest in Rackspace, argues Gleacher & Co. analyst Brian Marshall, as it tries to boost growth and move further away from low margin PCs. Dell's revenue is expected to rise an average of 4% through 2012, compared with Rackspace at 22%. And as a percentage of sales, Dell's earnings before interest, tax, depreciation and amortization, or Ebitda, is just 8%, while Rackspace's margins eclipse 30%. Plus, both have a niche serving small businesses.
Rackspace isn't cheap, however. At 14 times 2011 Ebitda, it already trades just above Terremark's valuation, which includes Verizon's premium.
Meanwhile, Savvis might make a good fit for International Business Machines, because the largest chunk of each company's revenue comes from financial-services customers. While Savvis is expanding at half the rate of Rackspace, it sports 26% margins and is valued at a more reasonable eight times Ebitda.
More slow-expanding, deep-pocketed giants might be tempted to splurge.