Entries in Deals - IT Services (4)


North State Diversifies Services with DataChambers Buy

ILEC to Acquire North Carolina-based Data Center Operator

High Point, North Carolina-based North State Communications announced on December 15th that it has entered into an agreement to acquire Winston Salem-based DataChambers, a data center operator and managed services provider. Financial terms of the deal were not disclosed. With its acquisition, North State becomes the most recent LEC to venture into the data center and managed service space, joining Warwick Valley Telephone (Alteva) and Twin Valley Telephone (ISG Technologies).

DataChambers is a ten year old company that provides data colocation and disaster recovery services for small-to-medium sized businesses within the Triad region (Greensboro, Winston-Salem and High Point) of North Carolina. The company currently operates two data centers in Winston-Salem, encompassing 120k square feet of data storage and disaster recovery space. It has also expressed interest in adding a third data center in order to increase its capacity. DataChambers' current roster of clients includes businesses from a variety of industries, including North State itself.

Upon the deal’s close, DataChambers will operate as a wholly-owned subsidiary of North State and Nick Kottyan will retain his position as ceo of the acquired entity. North State however will not acquire DataChambers’ records management segment, which provides hardcopy paper storage and management for customers.

The deal makes sense for North State on multiple levels. Geographically, North State operates in the same Triad Region of North Carolina that DataChambers calls home, and both companies serve the same business customers. From a competitive standpoint, the acquisition provides North State with a portfolio of business-centric services that it can offer alongside its broadband voice, video and Internet services, differentiating itself from other communications providers in the area. The independent LEC will also be able to cross-sell its existing business customers on DataChambers’ colocation and disaster recovery services, generating incremental revenue in the process. 

Most importantly, the data center/managed services space offers North State the potential for growth. Gartner projects data center spending to reach $99b in 2011, a 12.7% annual increase from 2010, and it forecasts that figure to rise to $127b by 2015. North Carolina in particular has become a hot-bed for data center development—with the likes of Apple and Google spending north of $1.6b to build properties in the state—thanks in part to its cost effective electric grid and relatively cheap land.

Consistent with the strong industry growth, DataChambers has improved its top line significantly over the past three years. The company grew its revenues from $3.5m in 2007 to $6.8m in 2010, expanding at a compound annual growth rate of 26% over that time frame.

While North State has not released details on how much it will pay for DataChambers, we have seen a number of priced data center deals over the past year, allowing us to make some educated estimates on the deal’s price tag. The weighted average revenue multiple for observed data center purchases in 2011 is around 5.4x while the median revenue multiple comes in at 4.3x. Based on these levels, and using DataChambers’ $6.8m revenue in 2010, we derive a price estimate in the range of $30-$36m.

In September, North State attempted to increase the visibility of its business services, rebranding its business segment “North State Business.” It stated that the name change reflects the type of customers that are critical to the LEC’s growth and longevity. The acquisition of DataChambers reinforces this sentiment.


8x8 Makes Second Cloud Buy This Year

Paying $29m+ for Contactual, Inc.

After years of existing largely as a Vonage-like VoIP voice service provider, Sunnyvale, Calif.-based 8x8, Inc. (Nasdaq:EGHT) is moving aggressively this year into cloud-based services and focusing more directly on business customers.  Earlier this summer it announced the $2.3m acquisition of Zerigo, Inc,, which provides virtual private servers, managed DNS services, and monitoring tools for cloud-based server operations. And on September 12, 8x8 announced it will issue more than $29m in stock to acquire hosted customer call center service provider Contactual, Inc.

Contactual, based in Redwood City, Calif., offers a Software As A Service (SaaS) solution that augments or takes the place of facilities-based call centers; presumably the virtual nature of the service makes it less expensive to deploy and more readily scalable.  The company has customers ranging from Fortune 500 companies to small and medium sized businesses.  In late July Contactual issued a press release boasting of strong second quarter growth:

"The continuation of our growth trend through the second quarter demonstrates the attractiveness and value of not only our solutions, but also our unique distribution model that is capitalizing on the increased demand for cloud-based solutions to simplify customer interaction management,” said Chris Brennan, president and ceo of Contactual. “This quarter we experienced significantly higher than market growth rates in our direct channel. Combined with the rapid increase reported earlier in our indirect channels, more and more organizations are improving customer satisfaction, increasing retention rates, and realizing the many additional benefits of cloud-based customer communications."

8x8 said that Contactual’s revenue in calendar year 2010 was $8.3m, including approximately $8m (10%) that came from 8x8.  8x8 has been reselling the Contactual service as part of its larger service mix since 2007. Based on trailing revenue, 8x8’s closing price before the announcement and the maximum  number of shares to be issued (6.7m shares), the deal multiple comes in at 3.5x. 

Shares in 8x8 have enjoyed a surge in popularity in recent months, and news of the Contactual deal pushed prices even higher. Based on the closing price of the stock before the acquisition was announced, 8x8 was trading for more than 4x run-rate revenue. The stock rose nearly 7% on the deal news today to close at $4.69/ share, or 4x pro forma estimated revenue.  The stock had briefly traded above $5/ share back in July, but YTD investors have enjoyed a near double.

In addition to the enterprise market, 8x8 is targeting the public sector. In late August it announced that it had appointed Vance Raeside as its Washington DC-based Director, Federal Sales, responsible for overseeing direct and indirect sales activity with federal, state and local government agencies. Raeside previously worked in public sector sales for Shoretel and Nortel. 8x8 also announced at that time that it has been selected selected by the City of Garden Grove, California to provide cloud-based disaster recovery services.

Raeside noted the growth potential expected in public-sector cloud services: "I'm thrilled to be joining a company as nimble and highly regarded as 8x8, especially in light of the Federal Government CIO's statement earlier this year that an estimated $20b of its $80b in IT spending is a potential for migration to cloud computing solutions."


EarthLink Addresses Cloud Security Concerns with Latest Acquisition

ISP Purchases IT Security Expert Business Vitals

Internet service provider EarthLink (Nasdaq:ELNK) has been on a shopping spree of late, acquiring multiple communications providers as it pieces together its managed services business. In August, EarthLink finalized its most recent deal, the purchase of Business Vitals. The move enhances EarthLink’s package of cloud IT services, and addresses a main concern for companies hesitant to embrace the cloud: information security.

South Carolina-based Business Vitals offers a range of IT solutions, but specializes in providing security measures. With its purchase, EarthLink acquires a Tier IV secure data center, a security operations center and a growing IT outsourcing business. Business Vitals' security measures combine threat monitoring and theft protection solutions with data vaulting, remote backup and data restoration--utilizing its data center. The data center will also help connect EarthLink’s fiber network, which is approaching 29k miles. While terms of the deal have not been disclosed, EarthLink confirmed to JSI Capital that the deal was much smaller than its recent deals, in the $1m-$10m range.

EarthLink has purchased a number of enterprise-centric, communications providers in the eastern U.S. over the past year, as it shifts its revenue mix more heavily towards its business services segment. It completed its $370m acquisition of integrated telecom provider One Communications in April, closed its purchase of hosted VoIP provider STS Telecom in March, and finalized its deal to buy ITC^Deltacom in December. 

Prior to these deals, in 2Q10, EarthLink generated over two thirds of its top line from consumer Internet customers, compared to only 23% in 2Q11. Currently, revenues from its business segment now represent 74% of EarthLink’s overall top line, compared to 22% a year ago. The purchases added density to its existing fiber networks, increasing its gross margins up to 50% in the process, according to the company.

While the Business Vitals acquisition expands EarthLink’s managed services portfolio with added IT outsourcing capabilities, it also serves as a complement to EarthLink’s recently launched cloud hosting business—EarthLink Cloud. In acquiring the security functions provided by Business Vitals, EarthLink makes its cloud hosting and managed services more attractive to SMB’s weary of data privacy and security. 

According to a recent study by the Evans Data Corporation, security was the most commonly referenced barrier for companies to move towards cloud computing—listed as the top concern by 30% of survey participants.  EarthLink management hopes the addition of Business Vital’s security expertise will remove this barrier, growing its cloud hosting business in the process.

"EarthLink is building a full range of managed IT services that focus on security as a key capability," said Brian Fink, EarthLink evp of managed services. "Business Vitals is an important extension of our managed services portfolio, and we will be actively leveraging the assets, capabilities and proven expertise we have acquired to enhance our national managed services business."

In a July presentation to investors, EarthLink framed its recent “cloud” efforts as a natural progression of its core business calling itself “The Original Cloud Company.” EarthLink touted its data center operations, strong online customer support, and online billing as virtual services that it has been providing for years. The ISP also pointed to a projected 25% compound annual growth rate in the use of virtual private networks over the next three years as a driving factor in its hosting venture.

With security concerns addressed with its purchase of Business Vitals, and the continuing expansion of its fiber footprint on the east coast, EarthLink feels that it is well positioned for managed services growth in the future.


Time Warner Cable Hops on The Cloud, Buys NaviSite

$230m Deal Fuels an Already White-Hot Cloud M&A Market

Time Warner Cable (NYSE:TWC) announced on February 1, 2011 that it will acquire NaviSite (Nasdaq:NAVI) for $291m, including the assumption of approximately $61m of debt.  Time Warner Cable will pay NaviSite shareholders $5.50 per share, a 33% premium to NaviSite’s closing share price on February 1, 2011.  The transaction is subject to NaviSite shareholder approval and other customary closing conditions and is expected to close during 2Q11. 

NaviSite is a provider of cloud enabled enterprise-class hosting and application management services headquartered in Andover, Mass.  NaviSite serves approximately 1,300 customers, including mid-sized companies, divisions of large multinational companies and government agencies, by addressing the information technology challenges faced by many organizations today including increased complexity, pressures on capital and operating expenses, resource constraints and the need for increasingly sophisticated technological expertise.  The company employs 570 people worldwide and operates ten data centers located in San Jose, Calif., Atlanta, Ga., Chicago and Oak Brook, Ill., Andover, Mass., New York City and Syracuse, N.Y, Dallas and Houston, Texas, and Watford and London, England. NaviSite also operates network operations centers in Gurgaon, India and Andover, Mass.

NaviSite began operations in 1996 as part of CMGI, the one-time dot.com darling now operating as ModusLink Global Solutions and NaviSite’s former majority shareholder.  The company was formed to support the networks and host websites of CMGI, its subsidiaries and several of its affiliated companies.  In 1997, NaviSite began supplying website hosting and management services to companies not affiliated with CMGI.   

Time Warner Cable is following the white-hot industry trend of marrying communications assets and operations with information technology and virtualization (read “cloud”) expertise.  The Time Warner Cable announcement comes just six days after Verizon announced plans to acquire Terremark Worldwide for $2b and follows a number of similar acquisitions by the likes of Telephone and Data Systems, Windstream and Cincinnati Bell.  

For NaviSite, the deal highlights the difficulty IT services companies are experiencing gaining traction and attracting capital on an independent basis, despite the current “IT” industry.  Unlike Terremark Worldwide, which was growing revenue at a CAGR of more than 27%, NaviSite has seen revenue essentially flat-line for the last four years.  With flat revenues, fierce competition and tight margins, NaviSite has only been able to convert about 16% of its revenue into operating cash flow, leaving little if any room to tap the debt markets for expansion capital.  Selling more stock isn’t a realistic option either.  NaviSite’s share price peaked at an “irrationally exuberant” and split-adjusted $2,306 per share back in the dot.com days of March 2000 but has been trading fairly consistently in the sub $5 range since 2003.  Issuing additional stock to generate expansion capital would severely dilute NaviSite’s current, and already battered, shareholders.

Time Warner will pay approximately $230m for NaviSite outstanding stock and assume approximately $61m of NaviSite debt.  NaviSite has available net operating loss carryovers that Time Warner Cable estimates will provide a future tax shield worth about $40m in today’s dollars.  The transaction implies a value of $251m for NaviSite’s operations.  That works out to 1.9x LQA revenue, 11.6x LQA OIBDA and $1,568 per square foot of available data center space.