CenturyLink (NYSE: CTL) once again went to the M&A pool this week with a $2.5 billion cash and stock bid for cloud, colocation and managed service provider Savvis Communications (Nasdaq: SVVS).
Similar to its recently completed acquisition of Qwest, CenturyLink's proposed deal for Savvis is also transformational from at least two angles.
For one, CenturyLink will expand its available network capabilities not only in the U.S., but also on a global scale with instant presence in both Asia and Europe. According to Savvis' recent customer numbers, U.S. makes up the majority of its geographic breakdown with 83 percent, while EMEA and Asia hold 13 and 4 percent, respectively.
Savvis appears to be on solid financial ground. In Q1 2011, Savvis reported $257 million in total revenue, up two percent sequentially and 19 percent year-over-year.
Upon completion, business customers will make up half of CenturyLink's customer base. While CenturyLink through its acquisition of Qwest gained a healthy hosting and collocation business that served various industry verticals, including the public sector via GSA's Networx Universal and Enterprise contracts, the purchase of Savvis gives them a ticket into the financial services market with clients like financial back office provider Innovest and other large trading firms.
Glen Post, CEO and President of CenturyLink a 30-plus year veteran of the company, said during the conference call announcing the deal is part of the company's transformation from a small town phone company to a national service provider, including new enterprise service capabilities it never had before buying Qwest.
"The acquisition of Savvis is the next logical step for our company," Post said. "With Savvis we now have a new platform that when combined with the CenturyLink hosting business and CenturyLink network we believe that will enable us to capture growth in managed, hosting, cloud computing and collocation businesses."
Amy Larsen DeCarlo, Principal Analyst, Security and Data Center Services, concurred that while CenturyLink may have not been the first company anyone would have thought to purchase Savvis, it does complement the hosting business it got from Qwest.
"Savvis has made a bigger push in markets abroad in Europe and Asia and has done quite a bit in the cloud," she said. "CenturyLink goes from being relatively quickly from being a rural telephone provider to being a global managed IT services provider, which includes a lot of data center and network services."
Combining both companies is also transformational for Savvis as well. By being bought out by CenturyLink, Savvis will be able to leverage customer relationships to accelerate growth and deliver services to a broader set of customers in addition to CenturyLink's established nationwide long-haul and local networks.
While Jim Ousley, CEO of Savvis, said in the acquisition call that he recognized the ongoing consolidation of the data center and cloud services market due to increasing demand from enterprise customers for these services, "we did not feel it was mandatory we participate in that consolidation unless we could find a combination that would benefit all of our stakeholders and we believe that this combination fulfills that objective."
Of course, the main challenge for CenturyLink will be integration of the Savvis assets and ensuring that integration won't disrupt service to Savvis' customers. Not only does CenturyLink have no experience being a managed service provider much less an international player, but it's still in the process of digesting Qwest and even pieces of the old Embarq. To maintain customer consistency, CenturyLink is consolidating all of its hosting operations under the Savvis brand.
Regardless of the challenges CenturyLink will face in integrating Savvis into its fold, the deal is representative of a larger acquisition frenzy taking place in the cloud services space that began late last with smaller ILECs with TDS Telecom (NYSE: TDS) purchasing TEAM Technology and Windstream (Nasdaq: WIN) buying Hosted Solutions. This frenzy was then amplified earlier this year by Verizon's (NYSE: VZ) acquisition of Terremark.
With the recent cloud computing M&A action as a backdrop, there's always a possibility that another service provider could come in and beat out CenturyLink. Nevertheless, the deal is part of an ongoing trend where service providers are augmenting their own organic hosting and cloud services drives with targeted acquisitions of other players.--Sean