Verizon Communications Inc. (NYSE: VZ)’s $1.4 billion acquisition of Terremark immediately strengthens its role as a strategic supplier to the U.S. federal government and its position in a rapidly growing Latin American market, as well as adding key assets for the white-hot global cloud computing market. (See Verizon Taps Terremark for $1.4B.)
The deal will put pressure on other global service providers — notably AT&T Inc. (NYSE: T), BT Global Services and Orange Business Services — to consider similar deals or partnerships, says Yankee Group Research Inc. analyst Sandra Palumbo.
“Yankee Group does believe that this deal gives Verizon a leg up over some of its main competitors on the transition to enterprise cloud services,” Palumbo says. “They are now getting access to an established and proven platform, which leverages VMware Inc. (NYSE: VMW) technology, and that can lead to quick and compelling enterprise cloud services offerings.”
Just as the move into managed security services a few years back touched off a flurry of acquisitions — Verizon bought CyberTrust, IBM Corp. (NYSE: IBM) bought ISS, for example — the race for cloud dominance could do the same, Palumbo says. Hosting companies such as Savvis Inc. (Nasdaq: SVVS), Equinix Inc. (Nasdaq: EQIX), Internap Network Services Corp. (Nasdaq: INAP) and Rackspace Hosting (NYSE: RAX) could be among those in play. (See Verizon Grabs Cybertrust and Managed Security: A Hot Ticket for Carriers.)
“If Verizon is able to execute and integrate in the fashion it did with the Cybertrust acquisition in the earlier portion of last decade, look for it to emerge as a strong competitor in the global infrastructure-as-a-service space,” says Aaron Blazar, VP of Atlantic-ACM . “Look for this move to spark similar deals as competitors step up their games and vie for market position.”
Verizon is adding some notable physical assets with Terremark’s 13 global data centers, including a 250,000-square foot Capitol Region data center facility in Culpepper, Va., which is “a go-to facility for government systems integrators and the U.S. federal government,” Blazar says. Terremark has been powering USA.gov and Data.gov since 2009, according to The Miami Herald, and got 21 percent of its revenue for the most recent quarter from the feds.
Latin America assets
A presence in Latin America, where Verizon hasn’t been very strong, is another asset of the acquisition. “People crave this market,” Blazar says. “Brazil, especially, is growing rapidly.” Terremark is strong in South America and derives 6 percent of its current revenues there.
Verizon was one of Terremark’s largest customers — Verizon essentially white-labeled Terremark’s cloud computing to offer a low-end service to compete with Amazon and others in 2010. So the deal wasn’t unexpected, says analyst Palumbo. It does reflect how quickly Verizon wants to move to its “Everything-As-A-Service” strategy, which Verizon President and COO Lowell McAdam referenced in today’s conference call on the acquisition. (See Verizon Takes On Amazon With SMB Cloud Offer and Verizon Aims for ‘Everything as a Service’).
“Terremark is a super buy for Verizon,” says Ari Banerjee, Heavy Reading analyst. “Verizon’s cloud service offering will get a huge boost, they now have the infrastructure to compete with Google plus they will get access to the government customer base. This puts them ahead of Orange and BT in terms of having the right arsenal to combat the OTT players.”
Terremark will initially be operated as a wholly owned subsidiary, keeping its name and Miami headquarters, but McAdam and Terremark CEO Manny Medina made it clear the intention is to rapidly expand the cloud business, using Verizon’s market muscle in areas such as Europe and particularly Asia, where Terremark hasn’t been as strong.
Keeping Terremark separate initially makes sense, Blazar says, to protect the 40 percent of its revenues currently derived from collocation in its facilities, but eventually Verizon will want to bring some of its cloud capabilities in house as part of the Verizon-branded solution.