MARKET COMMENT
C&W's Latest Acquisition: Good Or Bad?
By David Kuo (TMFDragon)
November 30, 2001
Carburton Street, London -- When we last wrote about Cable & Wireless (LSE: CW.), on the day the company released its interim numbers, we commented that the telecom group needed to be more efficient. Our main area of concern was the decline in profitability at its Global operation. To address the problem, C&W said it would reduce staffing costs, which represented almost 18% of revenues. We also said that it was not a case of what C&W could acquire to become a bigger player, but how it could improve what it had already. However, the chance of buying up the assets of the beleaguered Internet hosting company Exodus was just too tempting for the C&W to pass up.
C&W has made an offer, through the courts, to buy the assets of the bankrupt Exodus in a deal worth $850m. For this, C&W will get 30 of Exodus' 44 Internet data centres, of which 26 are located in the US, two in the UK, one in Japan and one in Germany. It will also get Exodus' 3500-strong client list, which is said to include the online portal company Yahoo (Nasdaq: YHOO). But C&W said it would need to pump another $250m into the company to take the Exodus business to a cash flow positive position by 2005.
In the twelve months ending September, Exodus reported sales of $1.2b. So C&W's total investment represents a purchase of just over a dollar of sales for every dollar that it will pay. For this, C&W gets 25% of the US web hosting market and at the same time, presents itself as a formidable challenger to Digex, which is part of the WorldCom Group (Nasdaq: WCOM). C&W should also be able to improve efficiency by combining Exodus with its existing Internet business Digital Island. This could be achieved by improving economies of scale, such as C&W cross-selling its Internet Protocol solutions to Exodus' existing customers.
While it would have been better for C&W to get its own house in order before looking at pastures new, this deal does seem too good to miss. C&W could have improved efficiency by focusing on a narrower geographic area, but instead it has chosen to expand the scale of its global operation. In one fell swoop, C&W has launched itself into the big league but it must still keep a tight rein on cost, especially on those employee numbers.
More: C&W discussion board.
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