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When Akamai is Bought, What Happens to Linode?

Akamai FishEarlier this year, Akamai announced they were acquiring Linode, a VM hosting provider.  They probably overpaid, as they bought at the height of the tech bubble and people always overpay.  Akamai forked over $900m.

Now that I look back at the press release, I see this interesting tidbit, and we’ll come back to this in a bit: “Akamai expects to achieve cash income tax savings over the next 15 years that have an estimated net present value of approximately $120 million.”  In other words, “we at Akamai are a much bigger company with a department of tax lawyers who’ll abuse gaps in the international accounting order to squeeze out a few points”.  Hmmm.  But I digress.

Just last week, Akamai announced plans to expand Linode significantly, adding datacenter presences in further locations in the US, India, Brazil, Indonesia, Japan, Sweden, Italy, France, and the Netherlands.  First on the list is Ashburn, Virginia, and the article I linked mentions Amsterdam, Chennai, Chicago, Delhi, Jakarta, Los Angeles, Osaka, Miami, Paris, Rome, São Paulo, Seattle, and Stockholm.  Surprisingly, Linode is not already in Chicago or Seattle…in fact, they only have five North American DCs (Fremont, Dallas, Toronto, Newark, and Atlanta), so there is plenty of room to grow.

But now it seems that after big fish Akamai ate tadpole Linode, a larger shark is circling overhead.

Akamai stock (NASDAQ:AKAM) jumped 5% today on rumors of a private equity takeover.  Back in May, rumors swirled over a mystery suitor, but nothing came of it.  Back in July there were similar rumors.  My network of spies and moles (who hang out on SeekingAlpha) report that activity and discussions are intensifying.

Each of these rumors has involved mysterious “private equity” who could be anyone.  Akamai has a $12.7bn market cap (which was closed to $20bn earlier this year).  I have to imagine the PE boys who wanted to buy at $15bn or $16bn are now trying to decide if Akamai will fall further – I mean, why overpay?

Akamai: Some Challenges

Akamai’s biggest problem is commodity nature of their core business.  There is no way to protect their revenue from competitors (there is no “moat” to use a popular analogy).

For example, consider Bunny.net.   Can they do everything that Akamai can do?  I don’t know, but they can sure do a lot of it and they don’t need 8,800 employees to do it.  I’m sure an Akamai salesman could demonstrate many cases where their features and services make a difference, but if a group of young entrepreneurs can replicate your core product working out of their homes, that’s a problem.

And here’s some proof:

  • Q2 revenue was $903m
  • They divide the business into two parts: Security and Compute, and Delivery (CDN)
  • Security and Compute is up 26% year-over-year.
  • CDN is down 11% yoy

In other words, the thing you think of when you think Akamai is a declining franchise.

Security and Compute could be thought of as all the business ventures Akamai has launched or acquired to replace their commoditized core asset.  $100m (they estimated) in revenue will be from Linode.  Some of their other offerings are serverless computing, edge applications (interactive code that is best run nearest the user), DDoS protection, and various security products.

The concern here is that managing a business that is producing less and less profit while scrambling to build up another business to replace is very difficult to do.  And even if you succeed, well then congrats your furious high-speed water-treading operation was successful, but it sure doesn’t sound like a good investment.

Also, remember those smooth account tricks?  The flip side of doing business around the world is that you have to interact with all the world’s currencies and problems.  With a strong dollar, rampant inflation, war, etc., operating internationally on a global scale is more of a headache today than it was a year ago.

I saw a report that suggested that the strong dollar has a net cost to Akamai of about 6% of revenue.  Ouch.

Wither Linode?

You can almost see the private equity guys in their conference room:

  • “So they’ve go this great network infrastructure”
  • “And cloud compute”
  • “And serverless”
  • “Plus security”
  • “This is the an Amazon killer!  We are going to rule the cloudz!!!!1!!”

However, when you break it apart, you get a lot of unintegrated pieces.  That’s not to say that integration is impossible and I’m sure people are feverishly coding it, but signing up for Linode does not open this magic kingdom of services – you just get what Linode offers.  You sign up for Akamai, sure, you can run some Linodes if you sign up at Linode, but this is not at the same scale of integration as Azure, Google, etc.

So if a PE company buys Akamai…what do they do with it?  I’d be more enthusiastic if it was a giant network or compute or cloud company that would rationally integrate pieces, but for someone just trading cash for the title, what’s their plan?

No one is going to buy it and think “ah, this is a geldscheisser I can just skim my profits from”.  Akamai needs a strategy and some work, and whoever buys it is going to be sinking in some serious cash (and taking on $3bn in debt on top of it).

Would a PE company keep Linode in the fold or spin it off?  I guess it depends on what the strategy is.  If someone is trying to build the Next Big Cloud, then Linode is key.  If they see the security business as the goldmine, they may want to get out of these commodity businesses and ditch CDN and Linode.  At first blush, you’d think a big CDN company would be living in a golden era of profitability given streaming, but then you realize how much competition there is (Amazon, Google, and Azure to name three obvious ones, much less other CDNs).

I see Akamai as fundamentally a collection of commoditized businesses in very challenging markets.  I’m not sure why someone would want to buy it, but someone evidently is at least kicking the tires.

 

 

1 Comment

  1. I just joined the forum so there are so many things I don’t know yet, I hope to have the help of the boards, and I really want to get to know you all on the forum

    October 5, 2022 @ 5:53 am | Reply

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