Shares of Akamai got a nice little bump earlier this week, partly due to rumors that Google was interested in buying the company for its CDN business. But does such a deal actually make sense? Not really.
Yes, CDN (Content Delivery Network) technology could help Google deliver YouTube videos faster or serve up search results more quickly. But if that’s what the company is looking to buy, there are smaller, cheaper, safer acquisition targets out there. Here are the top three reasons why a deal probably won’t happen.
1. The price is too high. After the run-up in Akamai shares earlier this week, the company’s market cap stands at around $3.8 billion. That means Google would have to offer about $4.5 billion just to get Akamai interested in taking a phone call, analysts say. While Akamai is clearly the leader in the CDN market, it is by no means the only player. And if what Google wants to buy is CDN technology, it can get that for a lot cheaper than what it would cost to acquire Akamai.
“There are other companies out there that have proven you can build your own CDN for a much smaller price than that,” says Kaufman Bros. analyst Colby Synesael. “Look at AT&T, who spent about $75 million building their CDN out. And Limelight is trading at around $350 million, which is one-tenth of what Akamai would cost. By no means do you have to spend 10 times Limelight’s share price to achieve that.”
2. CDN customers are high maintenance. Akamai’s $800 million in annual revenue is nothing to sneeze at, but there is no reason to believe that Google would have any interest in running a CDN business and managing its 3,000 customers. “You have to figure out why [Google] would want to acquire a CDN, and from my perspective it would be more for the network than for its customers,” says Wedbush Morgan analyst Kerry Rice.
That makes sense. After all, the CDN business — and especially the one that Akamai operates at the high end of the media and entertainment and e-commerce markets — is a fairly high-maintenance proposition with regard to the amount of back-and-forth that goes on between salespeople and customers. But Google has thrived in creating low-maintenance, automated and algorithmic business decisions, and labored in cases where it’s needed to step outside that comfort zone. It struggled when it needed to sign up premium content partners to contribute videos to YouTube, for instance.
3. Infrastructure issues. A Google acquisition of Akamai would raise serious issues surrounding Akamai’s network architecture. Its CDN works by distributing content from 50,000 servers located in last-mile ISP networks around the world. But after years of fighting with carriers like AT&T and Verizon, is there any reason to believe that those telcos would want Google servers located in their local network facilities?
“Part of Akamai’s value proposition is that they have free access to last-mile service provider networks to access their own servers,” Synesael says. “But who’s to say that will be maintained if Google were to purchase Akamai?” Chances are that access wouldn’t be maintained, in which case Google loses out on a big reason for making the purchase to begin with.
Tech M&A may be on the rise again, but the Google-Akamai rumor is just that — a rumor.