Thursday, February 3, 2011

Akamai Evokes AOL-Time Warner at 30 Years of Earnings

Akamai Evokes AOL-Time Warner at 30 Years of Earnings: Real M&A
Feb. 3 (Bloomberg) -- Akamai Technologies Inc., the U.S. company with the most takeover speculation since 2005, would cost almost 30 years of earnings in an acquisition, more than any other technology deal in the past decade.

Akamai, the Cambridge, Massachusetts-based provider of server space to help make websites load faster, rose 82 percent in the past year through yesterday, boosting its market value to $8.8 billion. Including net debt, the company trades at 22 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Based on the 31 percent premium for technology takeovers of $10 billion or more, Akamai would fetch 29.4 times its Ebitda. That’s almost triple the average in the biggest deals in the past 10 years.

With U.S. technology companies sitting on at least $274 billion in cash for acquisitions and a projected tripling of Internet traffic straining networks used by companies from Apple Inc. to Netflix Inc., Akamai’s share price has grown more than twice as fast as its profit in the past year. When America Online Inc. agreed to buy Time Warner Inc. for $186 billion in 2000 in a deal built on the promise of high-speed Internet access, it also paid 30 years of earnings, the data show.

“It’s difficult to rationalize those kinds of valuations and how one would extract reasonable return on M&A,” said Brian Barish, president of Cambiar Investors LLC, which manages $6.5 billion in Denver. “Akamai is an expensive stock on most conventional valuation measures. You’d need a ferocious amount of growth. It’s hard to make the numbers work.”

Biggest U.S. Deals

Barish’s $1.29 billion Cambiar Opportunity Fund has outperformed 99 percent of rival funds in the past year, data compiled by Bloomberg show.

Akamai was the subject of more buyout rumors than any other American company from 2005 through 2010, data compiled by Bloomberg show. The company was named as a target 21 times by electronic news services, brokerages or newspapers.

Since February 2001, six U.S. technology companies from Veritas Software Corp. to Freescale Semiconductor Inc. have been bought in takeovers of at least $10 billion, data compiled by Bloomberg show. On average, acquirers paid 11.6 times Ebitda in deals with announced premiums of 31 percent.

The historical average would value Akamai at $64.47 a share in an acquisition, versus the average of $49.22 in the past 20 trading days. Including net debt, the company would then cost about $11.2 billion, or 29.4 times its $381 million in Ebitda in the past year, according to data compiled by Bloomberg.

The most expensive deal was completed by Symantec Corp., the world’s biggest maker of anti-virus software, which in 2004 agreed to buy Veritas for 20.4 times its reported Ebitda. Mountain View, California-based Symantec fell 31 percent in the year after completing the takeover, versus a 1.3 percent decline for technology shares in the Standard & Poor’s 500 Index.

AOL paid even more for Time Warner. The acquisition valued the New York-based global media company at 30.48 times Ebitda, data compiled by Bloomberg show. The company, named AOL Time Warner, had planned to sell television shows and magazines via the Internet. Instead, it lost customers to faster online services from telephone and cable-TV carriers.

When the deal was announced in January 2000, the combined company was valued at about $350 billion. Two years later, it had lost about two-thirds of its market capitalization.

Apple’s Cash

Akamai, which supplies the computer power that speeds delivery of content over Cupertino, California-based Apple’s iTunes software, could make an attractive acquisition target for Apple, said Brian Marshall, an analyst with Gleacher & Co. in San Francisco. Apple had about $27 billion in cash and short- term investments at the end of December, Bloomberg data show.

Apple spokesman Steve Dowling declined to comment. The company’s shares slipped 1.2 percent to $340.37 today.

Options contracts on Akamai suggest that some traders are betting the company may be taken over. The ratio of outstanding calls, which give the right to buy shares, versus puts to sell has jumped by 40 percent from the end of November to 1.35-to-1, according to data compiled by Bloomberg. That’s close to the five-month high of 1.36 from Jan. 25.

Derivatives Bets

Open interest for calls is getting its biggest boost from the February $50 calls, which are this year’s fastest growing bets on the stock after jumping to 12,852 existing contracts from 2,223 and are now the most widely owned Akamai contracts, accounting for about 14 percent of all 91,075 outstanding calls. February $55 calls are the second most owned. The shares haven’t closed above that level since February 2007.

The most widely cited estimate of Internet traffic, from San Jose, California-based Cisco Systems Inc., projects it will triple by 2014, to 64 exabytes a month. An exabyte is equivalent to a quintillion bytes. Monthly traffic in 2006 was 5 exabytes, enough to store every word ever spoken. By 2014, more than 90 percent of the traffic will be video.

Akamai, which traded at 20.4 times net income a year ago, is now valued at 49 times, data compiled by Bloomberg show. The company went public in October 1999, with New York-based Morgan Stanley leading the sale, Bloomberg data show.

Future Growth

“There is a lot of future growth banked into its valuation,” said Ken Smith, a money manager at Birmingham, Michigan-based Munder Capital Management, which oversees $14.3 billion. “That doesn’t mean someone couldn’t take them out, but it does make it more difficult for someone to make an offer.”

Elsewhere in mergers and acquisitions, Sony Corp., Japan’s biggest exporter of consumer electronics, agreed to acquire Seiko Epson Corp.’s Chinese liquid-crystal-display subsidiary for 775 million yuan ($118 million) in cash, the Tokyo-based company said yesterday in a statement on its website.

IAC/InterActiveCorp said yesterday its Match.com division acquired OkCupid, a U.S. online dating service, for $50 million in cash. OkCupid generates revenue primarily through advertising sales, unlike New York-based IAC’s other dating sites.

There have been 2,196 deals announced globally this year, totaling $178.1 billion, a 15 percent increase from the $154.2 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Alex Sherman in New York at asherman6@bloomberg.net.

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