There are so many truisms in investing that it's difficult to narrow it down to the three or four most important. But I'd say this is one: You can never do enough due diligence, especially when it comes to the stocks you already own. That's why I've got homework this week.
Akamai Technologies (Nasdaq: AKAM ) , my second-largest single holding and a Motley Fool Rule Breakers pick, announced yesterday that it completed its acquisition of privately held rival Speedera Networks. The deal merges Akamai with its most fierce and successful independent competitor and retires what could have been damaging litigation. Earnings and cash flow should also benefit.
Yet questions remain about how the new company will be structured. CEO Paul Sagan took a stab at answering at least some of them in this open letter to Speedera customers. The top priority, he said, is to merge the two firms' content delivery platforms over the next year. The letter lacked other details, but more will apparently be forthcoming during the company's second-quarter earnings conference call, scheduled for July 26. As a shareholder, there are three things I'd like to see at that time:
1.Strong evidence of increasing cash flow. Cash flow is what most excited me about the Speedera deal. Sure, Akamai issued 12 million new shares -- worth nearly $170 million as of this writing -- to finance the purchase. But that dilution isn't likely to have much of an impact on earnings per share. Cash flow, however, should improve appreciably. My initial estimates have Speedera adding $20 million to Akamai's sales for 2005. At that rate, the company should book $272 million for the year. Apply its recent owner earnings margin of 20% and you end up with $54.4 million in structural free cash flow for 2005, a 32% increase over last year's total.
2.Revenue growth north of 25% for 2006. When Speedera last reported selected financial results, the evidence pointed to a company growing sales at close to 40% annually. Akamai ought to be able to take advantage of some of that momentum. If it does, 25% growth in 2006 ought to be achievable.
3.A customer retention rate north of 75%. The key to this merger is retaining the vast majority of Speedera customers. There's no reason this shouldn't happen, either. Akamai already controls close to 70% of the market. And the alternatives that exist, including open-source options, simply can't replicate Akamai's global scale. That means all but the smallest customers ought to stick around. I'll be concerned if the numbers show otherwise.
Are there other items worth watching? Tell me. I'll add the best suggestions to my Akamai homework.
For related Foolishness:
- Get the details of the merger from the very beginning.
- Surfing in December? Cowabunga.
- Grab your board, dude. The water's still nice.
Akamai is a recentMotley Fool Rule Breakerspick. Don't mind taking a little extra risk for the chance at multi-bagger returns? Our Rule Breakers newsletter is perfect for you. Give it a try risk-free for 30 days.
Fool contributor Tim Beyers owns shares of Akamai, and yep, he thinks the Speedera deal is a bargain. What's your take? Share your thoughts with other Fools at the Akamai Community discussion board. You can find out what else is in Tim's portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.