Akamai Technologies faces stiff competition in talks to acquire web application acceleration rival Cotendo for $300-350 million.
Sources inform ''Globes'' that two Cotendo Ltd. strategic partners, Juniper Networks Inc. (Nasdaq: JNPR) and AT&T Inc. (NYSE: T) have joined the race against Akamai Technologies Inc. (Nasdaq: AKAM) to acquire the website and mobile applications accelerator solutions developer. Earlier media reports said that Akamai was in advanced talks to acquire the company for $300-350 million.
Cotendo CEO Ronni Zehavi, VP R&D Udi Turgeman, and CTO David Drai, all former executives at Commtouch Software Ltd. (Nasdaq: CTCH; TASE: CTCH), founded the company in 2008. The company is headquartered in Silicon Valley and has offices in Kfar Netter, near Netanya in Israel.
Cotendo's customers include tier-1 telecommunications vendors, e-commerce sites, social networks, and advertising networks. The company has raised $39 million from Benchmark Capital, Sequoia Capital, and Tenaya Capital, as well as strategic investments by Juniper and Citrix Systems Inc. (Nasdaq: CTXS). The founders presented their idea of new and cheaper products to transmit web content to Sequoia Israel managing partner Haim Sadgar and received $3 million two weeks later.
If Cotendo is acquired at the amount reported, it will be one of the most successful exits by an Israeli high-tech company in the past decade, with a ten-fold return on capital - $100 million - for its first investor, Sequoia, and a return of 2-7 fold for the other investors.
The interest in Cotendo is driven by the change in online content consumption in recent years. Whereas in the early 2000s, most content comprised static content of text and pictures, current content involves much more moving content, such as video, e-commerce, and real-time communications, which is more sensitive to delays and cut-offs. Content volume has also grown massively.
The change in internet content needs better solutions for managing it - Dynamic Spectrum Access (DSA) for improving website applications performance, which Contendo provides. The company currenly has 300 customers, including online giants such as Facebook, Zyngo, MyYearBook, and Israeli start-up ConduIT Ltd. Sources estimate that Cotendo's revenue will reach $50 million this year.
Akamai is the company that invented DSA in 1998, and until recently was the only company offering solutions in that field. Co-founder and CTO Daniel Lewin was an Israeli who was killed in one of the planes that crashed into the World Trade Center on September 11, 2001. The other co-founder is Tom Leighton. The company's technology keeps popular content at a point physically close to the user, thereby reducing loads on content providers and service providers' Internet servers. Akamai's market cap is $4.7 billion, following a 50% fall in its share price since the beginning of the year.
Cotendo's entry into the market three years ago slashed Akamai's prices and Cotendo steadily won market share and customers from it. Cotendo's prices are half the prices of Akamai, making it a persistent rival, despite its small size. Cotendo's strategic partnership with AT&T, enabling it to directly compete against Akamai, further increased the pressure on it to do something to stop Cotendo.
Akamai sued Cotendo for patent infringement in November 2010, with the objective of either acquiring Cotendo's or drowning it in legal fees. Since the lawsuit was filed, Cotendo has been up for sale. The potential buyers are Akamai, a serial suer that has previously acquired companies it sued; and AT&T, which might exercise its first refusal rights to acquire the company. A final decision will be made in a few weeks.
The content delivery network (CDN) market is undergoing consolidation. Two companies - Limelight Networks Inc. (Nasdaq: LLNW), and Level 3 Communications Inc. (Nasdaq: LVLT) are considering a merger.
A few months ago, Zehavi told "Globes", "Akamai is known as a serial suer, and for us this is proof that our product worries it." He also spoke out against a premature acquisition, saying, "We're not a company that will disappear. We've developed an infrastructure, not a feature. We're here to create a great and profitable company."
Zehavi was unavailable for comment on this report, as he is on a Thanksgiving vacation.
Published by Globes [online], Israel business news - www.globes-online.com - on November 27, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011
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