Akamai Still Shopping

When Rule Breakers pick Akamai Technologies (Nasdaq: AKAM  ) bought Nine Systems for roughly $164 million in November, I wrote that it would likely be the first of many deals to come.

We'll have to wait at least several more months to know whether I was right, but my prediction is looking good thus far. On Monday, Akamai said it would acquire Web application acceleration specialist Netli for 3.2 million shares. Akamai's Monday close of $58.18 valued the deal at $186 million.

What do shareholders get for that sum? Not much, apparently. Management says that Netli will have no impact on Akamai's 2007 normalized earnings.

So why do the deal? Diversification. While Akamai's primary focus remains bringing consumer-oriented Web content geographically closer to users, application acceleration -- which allows software with multiple parts, such as portals, to communicate more easily over the Web -- is now big business thanks to Web 2.0 and globalization. Technology researcher Gartner says the market is on pace to grow to $3.3 billion by 2010.

But before the deal, that was better news for Netli than it was for Akamai. As Gartner research director Joe Skorupa told the Red Herring, "Akamai didn't just acquire some good assets, they also took out their primary competitor in the application acceleration market. Frankly, Netli was starting to take business from Akamai with a very good solution at a very aggressive price point."

To me, that brings forth visions of Speedera, which combined excellent technology with cut-rate prices in a bare-knuckles fight with Akamai before it was acquired in 2005. Similarly, Netli's technology, which trims out redundant traffic to help software application components talk with each other and complete tasks over the Web, has been winning customers such as Hewlett-Packard (NYSE: HPQ  ) and Thomson Financial.

That's why this deal had to be done. With immediate competition from Internap (Nasdaq: INAP  ) and Limelight, and potential competition from Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) , Akamai needs as many new fertile fields of growth as it can muster. Adding Netli provides that.

And, if history serves, the deal could also bolster margins. Before the acquisition, Speedera's average revenue per customer (ARPU) was roughly $12,000. That would have been a concern -- if Akamai weren't able to upsell its services. But it has; overall ARPU for the third quarter grew to $17,500, up 7% from Q2, and up nearly 20% from $14,600 during last year's Q4.

No wonder investors loved this deal. Akamai's shares, up 4.7% for the day, were subject to a frenzy not seen since Dick Cheney crashed the annual Up With People conference. (Or at least that's how I imagine it.)

Today, though, those same investors are fleeing faster than a Porsche 911 on the Autobahn. Akamai's stock is down 4.2% as I write. Are they having misgivings? Or is it just Mr. Market's maniacal spin cycle at work? Let's hope it's the latter. Akamai's stock is by no means cheap, but even without an immediate earnings gain from Netli, the rule-breaking Web weaver is in a far better position today than it was yesterday.

A web of related Foolishness awaits:

Akamai is one of six Motley Fool Rule Breakers picks, unearthed by David Gardner and his team of analysts, that have more than doubled in the first two years of this market-beating service. Discover the other five with a free 30-day trial.

Fool contributor Tim Beyers, ranked 1,016 out of more than 21,600 in CAPS, is a sucker for growth stocks and a regular contributor to Rule Breakers. Tim owned shares of Akamai at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. Yahoo! is a Stock Advisor pick. The Motley Fool's disclosure policy is a rebel with a cause.


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