C&W finds a bargain in Digital Island

Cable & Wireless PLC appears to have filled a glaring need with Monday's bargain-basement purchase of Web hosting service provider Digital Island Inc.

Anxious to expand its U.S. presence, Cable & Wireless for several months has been on the prowl to acquire a Web hosting provider at a cost commensurate with new market realities. The price tag on Digital Island was US$340 million.

The initial plan is for Cable & Wireless and Digital Island sales teams to sell both companies' Web hosting services. Cable & Wireless customers will have access to Digital Island's high-end Web hosting and content distribution services, while Digital Island customers will have better access to high-speed network services.

Cable & Wireless has 22 data centers worldwide, but only two are in the U.S. The firm has stressed its desire to expand its managed Web and application hosting business, and it needs additional facilities in the U.S. to make that happen.

Digital Island brings 10 data centers, with U.S. facilities in New York, Boston, San Jose, Los Angeles and Honolulu. The acquisition also brings large corporate customers to Cable & Wireless.

Digital Island says 70% of its service revenue come from large corporate users. Cable & Wireless has a few marquee customers, such as Barnes & Noble, but not nearly as many as Digital Island, says Melanie Posey, senior analyst at market research firm IDC.

This is a bargain buy for Cable & Wireless, Posey says. The purchase price of $340 million equals $3.40 per share. Digital Island's stock traded as high as $148 per share in December 1999. However, in the past three months, the company's stock hasn't traded much above $2.

"Turbulent times create huge opportunities," said Cable & Wireless CEO Graham Wallace in an interview with Network World last month. "Weaker players suffer, which ultimately is good for our competitive position. This opens the door to some interesting opportunities in terms of purchases."

While many companies are cash poor these days, Cable & Wireless has at least $3 billion in the bank. The current economy is letting the service provider get the most for its money.

"With Digital Island's debt, [Cable & Wireless] is paying about $400 million for the company. That's bus fare for Cable & Wireless," Posey says. "Digital Island wasn't going to make it on its own, so this is a good exit strategy for them."

Digital Island's headquarters in San Francisco will be maintained, and its management team is expected to remain on board, says Marc Lefar, executive vice president of marketing at Cable & Wireless.

Lefar says Cable & Wireless has not ruled out other acquisitions in the U.S., U.K. or Japan.

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