In the last few days two IP backbones, each large in transit but small in the overall telecom world, made quiet moves that have given them an extra $200M or so to play with. GTT filed a shelf with the SEC in that amount, while Cogent Communications has tapped the debt markets. And while it's probable that there's nothing relating the two moves (I certainly don't have any information about either company's plans), it still got me thinking. What sort of inorganic move would make sense for an independent IP backbone right now? After a bit of thought, I came up with an idea that ties together a few threads and even fits the price tag.
These are very different companies of course. Cogent has been tightly focused on organic expansions, eschewing M&A and returning cash to shareholders through dividends and such -- in fact I find it puzzling they would tap the debt markets now at all. GTT is at an earlier stage in development and lives at a higher level of the network with little or no fiber in its diet. They seem ready for another inorganic move, but they're quite a bit smaller and $200M would be a lot for them, far more than they've spent on other purchases. Very different stances and outlooks, but there is one common thread.
Both companies operate top-10 global IP transit backbones, and that business looks like it's in flux given the way last mile operators are pushing things. Netflix's travails are just the public edge of a wider underlying shift that will surely affect the IP transit business model. And of all the world's top IP transit backbone operators, GTT and Cogent have the greatest dependence on it.
So, let's say you're operating a transit backbone that in an increasingly video dominated world and you are seeing or expecting continued pressure at the peering layer to manage traffic ratios the way the big guys are demanding or else pay up. The tea leaves are pretty clear, with the chances of substantial regulatory intervention looking weak. While you'll definitely fight the good fight over the right to settlement-free interconnection, you do have shareholders and a responsibility to adapt to things you can't change. You need to find a way to play this new environment before it plays you.
So what do you do? Buying fiber and moving deeper into infrastructure is expensive right now with high multiples and well-funded competitors, so that's not likely to work out. But if you're going to eventually be forced to pay for peering by the last mile, why not buy someone that already does that for video bits as a business model and pair it with your own. Why not buy a CDN and take a two-pronged approach to delivering traffic, doubling your flexibility so that you can control when the congestion hurts and when it doesn't. In other words, if the last mile is going to treat you more and more like a CDN anyway then why not take up the sword and hit them with it.
It just so happens that there is a CDN out there whose enterprise value is a bit under $200M at current prices. I'm speaking of Limelight, of course, although there may be privately held ones out there that would fit as well. Limelight buyout rumors have come and gone over the years, although they've receded lately. With the sale of its content management business a few months back, Limelight is much more streamlined and looks like an easier target for a smaller network operator than it has in a long while.
While the previous milieu of separation between CDN and transit held force, such an idea was a real longshot. But look at it now in light of Cogent's loss of Netflix transit bits to Comcast and likely further deals. Buying Limelight would give someone like Cogent two different delivery methods to the ISP, and there would surely be substantial synergies available in putting Limelight's business model onto Cogent's deeper fiber and data center infrastructure.
The same general idea goes for GTT, although in a more speculative fashion with less infrastructure and more interest in additional cloud and managed network services. The former Inteliquent backbone has a major international presence, but just what GTT will do with it that Inteliquent couldn't is not yet clear. They're clearly assembling something over there, and this sort of idea makes as much sense to me as anything else.
Could the spread of net neutrality wars to the transit/peering world lead to mergers like this? How crazy am I? Don't answer that...
Ok, go ahead, answer it.
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