Akamai: What's the Money For?

Dear Paul,

Yesterday, your company, Akamai Technologies (Nasdaq: AKAM  ) , announced a secondary offering of at least 12 million new shares of stock, substantially diluting the interests of current shareholders like me.

I'm not happy about it. Neither are the many who follow your stock through our discussion boards here at Indeed, there have been many lucid comments posted regarding the move. Here's a sampling:

  • Akamaidoesn't need the money. This comment, offered by longtime poster coolprash, is dead on. My own recent analysis of your financials led me to conclude that structural free cash flow would exceed $58 million during 2005. That total should also grow over time and supplement the more than $80 million your company has in the bank.
  • If management believes the shares will continue to go higher, why sell more stubs now? This came from poster SteveCK072, and he, too, makes a valid point. In a story published by the Red Herring, a spokesperson on your staff suggests that the "timing was right" for the offering. Can you see how some might interpret that to mean the stock has gone expensive and it's high time you profited from the madness? I sure can.

Look, we all know that secondary offerings aren't inherently bad. In fact, they're often quite good. They can provide needed liquidity, for example, or add resources for firms stuck in a highly competitive market. Google (Nasdaq: GOOG  ) and its fight against Microsoft (Nasdaq: MSFT  ) comes to mind in that sense.

But you can't really claim either, so you've chosen to ask shareholders to simply keep the faith. Yeah, I know, a filing with the SEC is expected for later today, but I doubt it will lend more to what we already know. You're getting $200 million to "make further investments in the business," and potential acquisitions are on the table, too.

Fair enough. Maybe you're in negotiations currently and can't say anything. Or, frankly, maybe we ought to just trust you. After all, you've been part of the management team that has lifted Akamai from a $175. 5 million deficit in tangible shareholder equity at the end of 2002 to a deficit of $82.3 million as of the third-quarter report. That's a big improvement.

I'm inclined to trust your judgment, Paul. I think you're an honest manager. And I think you're seeking opportunities to expand shareholder value. But I've no clue as to why you need $200 million more to do that. All I see is the impact: 13.8 million new stubs -- the maximum with over-allotments -- could run your diluted share count for 2006 to as high as 178 million. And this, incidentally, doesn't include the impact of stock options or your revised tax rate. Which means that in the absence of some profitable means of investment, either the shares are dropping or the forward multiple is increasing. And I could go on.

I'm an investor, Paul, not a fan. I like your business. I think you and your management team have made a number of good moves. But you're about to make Akamai's stock a lot more expensive, which will hurt my returns unless you invest very, very well. And I think I have a right to know how you plan to do that.

Foolish best,


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Fool contributor Tim Beyers owns shares of Akamai. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.

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