Verizon Beefs Up Data Center Power With Terremark Purchase

Verizon (NYSE: VZ  ) may have been quiet on the M&A front in 2010 apart from selling off its rural assets to Frontier (NYSE: FTR  ) , but as it sees a growing demand for cloud services the service provider is shelling out $1.4 billion to acquire data center operator Terremark Worldwide (Nasdaq: TMRK  ) .

As one of its largest acquisitions since its $6.8 billion purchase of the former MCI in 2005, Verizon's move is aimed at capitalizing on the growing cloud computing market -- one that it believes is a major growth engine for its wireline business.

Ivan Seidenberg, Chairman and CEO of Verizon said during the recent 21st annual Citi 2011 Global Entertainment, Media and Telecommunications Conference in Phoenix that cloud services will be a major growth engine in its wireline network strategy.  

"We're going to put some muscle behind this whole idea of the cloud and put some muscle behind the idea of further geographic expansion of our enterprise network," Seidenberg said. "We're feeling good that we have an opportunity to kick up some basis points higher in the wireline business."

When the deal -- which has already gotten approval from both the boards of both Verizon and Terremark -- is closed, Terremark will be run as a wholly owned subsidiary of Verizon. In addition, Terremark will retain its name and the current management team will continue to run the company.

Verizon's acquisition of Terremark reflects the telco's drive to expand its "everything as a service" and data center capabilities both domestically and internationally. Having already built out 220 data centers in 23 countries, the acquisition of Terremark will give Verizon another 13 data centers in the U.S., Europe, and Latin America along with a number of federal government customers.  

The telco's move represents a larger trend of traditional service providers expanding the roles as technology providers by deepening their cloud services, hosting, colocation, and data center services by making strategic acquisitions of providers like Terremark.

According to Analysys Mason's 2010 cloud services forecast, service providers such as Verizon provide only 9% or $1 billion of the worldwide cloud services today, but by 2015 service providers that number will rise to 23%, or about $8.2 billion, of the worldwide cloud revenue to enterprises.    

Steve Hilton, lead analyst for Analysys Mason's enterprise program, said in an e-mail interview with FierceTelecom that "acquisitions between partners in the industry are absolutely necessary to allow this sort of growth in the market share of communication service providers," adding that "the Terremark acquisition will give Verizon Business a stronger foothold in Europe and Latin America."

Still, to make the acquisition a success, Hilton believes that Verizon will need to stick to its promise of maintaining Terremark it as a separate subsidiary.  

"Verizon is going to have to allow the Terremark team to continue to shine," said Hilton "If the Terremark assets and teams are swallowed into the corporate morass of legacy Verizon, surely this will be another example of a squandered acquisition opportunity."

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