This is the biggest news for the CDN industry in ages. For Akamai, the impact will be dramatic, disruptive and unprecedented. For the CDN industry, it depends.
If Akamai is forced to sell, then it will also be dramatic, disruptive and unprecedented for the CDN industry in a good way: in this fiercely competitive niche that has 40+ competitors (which doesn’t include the powerful cloud oligarchy of AWS, GCP and Azure), its sale will mean it is raining heaven for the competition.
Elliot Management, the activist hedge fund, has just acquired 6.5% of Akamai. Elliot Management is run by its billionaire founder, famed activist investor Paul Singer, who loves nothing more than to tango with big corporations and even sovereign nations. Brad Zelnick, a Wall Street Analyst with Credit Suisse (#644 out of 4,719 in TipRanks’ ratings) has made several interesting statements in regards to Akamai lately, including the following:
- Zelnick says, “there are multiple financial and strategic buyers” in line for Akamai;
- His LBO analysis suggests that a buyer can pay $80/share and get 20% IRR over 5 years;
- Finally, Zelnick stated that Akamai’s general and administrative (G&A) costs are inefficient compared to those at other software companies; for example, Akamai’s G&A is 320bps higher than Autodesk’s.
Disclaimer: Before I say any more, keep in mind this is my own personal opinion. I’m just a blogger having a little fun here. I’m not qualified to give any financial advice.
Now, let’s debate Brad and provide our perspective. To point #3, what does AutoCAD and Maya have to do with Akamai? As Brad stated, Autodesk is a software company, but we all know that Akamai is not a software company. Akamai is the equivalent to a service or utility company, just like DWP (the Dept. of Water and Power), Google Cloud, Comcast or AWS. The point being – one can’t compare AutoCAD to Bot Manager.
On point #2, an LBO for Akamai is the worst idea of the year. An LBO (Leveraged Buyout) is the acquisition of a target company that uses a high level of debt. If Akamai is sold, two things will happen; to what degree they happen, depends on who the acquirer is. First, there will be some customer churn. Second, there will be numerous talented folks that leave Akamai for the competition: rock star engineers, programmers, architects, etc. The only thing keeping these people at Akamai right now is their culture and the notion that they work for something bigger, in this case, the largest pure-play CDN in the world, and would add that for many, Danny Lewin’s legacy is a key driver as well — they want to finish what he started. If this mission is tainted in any way, there will be herds of very talented engineers heading for the nearest competition and taking their ideas with them.
We understand that Akamai should have been AWS and only failed to do so because they focused too exclusively on CDN. But one thing is certain. Akamai’s engineers are highly coveted and the competitive sharks are constantly circling them in a mad frenzy, trying to lure them away. So if Akamai gets acquired, and even worse, fires its staff, a lot of top talent will say, “The hell with this, I’m out”.
The degree of employee exodus depends on who the acquirer is. If Microsoft is the one to snap up Akamai, some of these talented individuals will no doubt leave. If a telco buys Akamai, a whole lot more will go. And if an LBO happens, and Akamai gets acquired by an investment concern, there will be inevitably be a mass exodus of talent.
On point #2, there might be a line of suitors going around the corner interested in Akamai. However, there are only three companies that are a good fit and these don’t include Comcast, since they haven’t figured out the CDN business or AWS. Those three companies are: Microsoft, Google and IBM; in that order. Anyone else is likely to drop the ball.
- Microsoft: Currently uses Akamai for Azure and clients. They have a strong relationship with Akamai;
- Google: Doesn’t really have a full featured CDN and are behind AWS in this service;
- IBM: Strong relationship with Akamai and they don’t really have a fully featured CDN;
The Akamai Network
We are big fans of Akamai. They have done an incredible job in the CDN industry.
In regards to their network, Akamai has a good, solid global network that leverages a feature called Sureroute, a BGP overlay. Keeping this vast global network at the cutting edge is very difficult, even for the smart folks at Akamai.
Unfortunately, Akamai doesn’t have a truly great network. That title belongs to Google Espresso, Facebook Open/R, Aryaka Networks and Limelight Networks. These four have great networks. They are each a game changer, if you will, in the networking space. They have next generation networks, something that is coming in handy as the worlds of CDN, cloud security, SD-WAN and networking converge.
The difference between Akamai and these companies lies in BGP Overlay vs. Private Network.
It has been said that Akamai is in the process of building out its Private Network. That’s good, but it will take an incredible amount of capital and engineering effort to build it out completely, because after all, they have thousands of PoPs dispersed around the world.
Thus, if Akamai gets acquired, and some of their top network engineers leave, then its global network that is already behind, will get yet further behind, and the competition will take their opportunity, and steal a boatload of customers and talent. The CDN industry is fiercely competitive. One small misstep, and Limelight, Fastly and others will come in for the kill.