On Monday, Motley Fool Rule Breakers pick AkamaiTechnologies (Nasdaq: AKAM ) announced that it would be buying privately held Nine Systems for $7 million in cash and 3.1 million new shares of stock. That's roughly $164 million as of Tuesday's close.
I'm intrigued by this deal for several reasons, including the structure of the arrangement. But I'll get to that in a minute. First, let's review what Nine does and why it might benefit Akamai.
Nine Systems offers a suite of services controlled through what it calls Stream OS. With it, clients can determine how and where their content will be delivered, apply copy protection, and track the results of distribution. As part of Akamai, Stream OS will become a value-added service, like an all-purpose fix-it shop for the highway owner who makes money by charging tolls to passing cars.
Will clients buy it? I can't see why not. I've written before that the real long-term opportunity in Web-based content is likely to come not from Google (Nasdaq: GOOG ) , Yahoo! (Nasdaq: YHOO ) , Microsoft (Nasdaq: MSFT ) , or Apple (Nasdaq: AAPL ) , but from those that have neither the time nor the capital to create whole distribution infrastructures but that also wish to use the Web for marketing. That number is growing daily. Witness YouTube, which has become an outlet for clever pitches.
If the YouTube effect has a long tail -- and I believe it does -- then exponential growth in Web content is still forthcoming. That's good news for Akamai. But it's also bad news, because it means there's still plenty of moola for up-and-comers who hope to innovate my favorite Breaker right out of business. Among the list of hopefuls are Limelight, Internap (Nasdaq: INAP ) , and, truth be told, just about every data center provider there is.
Fortunately, Akamai has a moat around its business in the way of patented algorithms that help properly coded ("Akamized") Web content avoid digital traffic jams. Delivery speed is a function of efficiency rather than brute force, as is the case with pure broadband.
But now alternatives are getting wise. Limelight, for example, has a created a centralized network of server farms and its own software for managing efficiency and speed. Industry researchers say the approach has worked well and, thanks to an emphasis on rich media, has lured big video sites such as YouTube.
Enter Nine. With it, Akamai offers customers the ability to produce, protect, and distribute rich media on the cheap. And while the release doesn't say so, what's to stop Akamai from pitching Stream OS services to customers who prefer the open-source BitTorrent or a competing network? Naturally, Akamai would love the technology to be an on-ramp to its own digital highway, but doesn't it make sense to also make money on those who insist on taking the Internet's surface streets? I'd say so.
And that, in a nutshell, is the point. There's really no end to the number of services to be offered to those who use the Web for business. Analytics, development, support, delivery, etc. -- all of it must be addressed either in-house or elsewhere. Nine could be the first step Akamai takes toward creating the world's most comprehensive digital media services firm.
My guess is that's exactly what has occurred here. Consider the financial picture. Just one year ago this month, Akamai announced a secondary offering worth roughly $200 million. Today, the firm has more than $400 million in cash and investments and $200 million in convertible notes that it won't have to pay down with cash; they're already accounted for in Akamai's diluted share count.
With $400 million to play with, Akamai really has no reason to use stock to buy Nine Systems. Unless, of course, the firm is eyeing other deals -- deals that could add new and different functions to a fast-growing and market-leading platform for moving content on the Web. So expect more soon. And remember, you heard it here first.
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