C&W reiterates Web-hosting commitment

It’s not clear whether Cable & Wireless is getting a bargain by spending $850 million on Exodus Communications or the carrier just paying an entry fee into a morass from which the bankrupt Web-hosting leader could not escape.

The price seems right. C&W is spending $580 million in cash and $270 million in assumed liabilities for a company that was worth about $15 billion at the height of the Internet boom. Since then, Exodus retreated into Chapter 11 bankruptcy and said its common stock likely would be valueless. C&W estimated it will cost another $250 million to make Exodus profitable.

Still, the deal “does make some sense economically,” said one industry source. “They’re paying less than 25 cents on the dollar for what Exodus paid for it.”

Speculation had C&W buying Exodus months ago when it acquired Digital Island, a high-end Web-hosting and content-delivery company. Now, with the market nearly bottomed out and the price more palatable, the Exodus purchase gives C&W significantly more scale to its Web-hosting portfolio.

Under the deal, C&W will get Exodus’ most profitable data centers--26 in the U.S., two in the U.K., and one each in Frankfurt and Tokyo. The carrier also would get most of Exodus’ employees and almost all of the equipment related to Exodus’ customers, including those in data centers it’s not purchasing. Even if their customers move from the 26 data centers C&W is not purchasing, the data sites would be at about 35% capacity, leaving plenty of room for more customers--or just plenty of room.

“Tech improvements are making space less of an issue than it was a year or two ago … so there’s no need to have a huge data center to house all these servers that are coming online,” said Helen Chan, an analyst with The Yankee Group.

C&W considers co-location “a traffic generator,” but its primary interest is in managed Web hosting, a company spokesman said.

Moving Exodus customers to managed Web hosting could be problematic because Exodus has been carrier-neutral and its new owner would be a carrier.

“I’m not sure how that plays in to the customer’s mindsets, whether they want to play only with Cable & Wireless,” said Chan.

Exodus submitted a motion to approve the sale to the federal bankruptcy court in Wilmington, Del. The court should hear the motion Dec. 13 and establish a bidding procedure for other interested parties. After 30 days, the court will review the bids and pick a winner that will face an evolving business.

Despite Exodus’ troubles, the Web-hosting market continues to grow, according to an Exodus spokeswoman And C&W would do well to be a player, Chan said.

“The market’s not going to go away,” she said. “It’s easier and cheaper [for C&W] to buy than to sell to these customers themselves.”

This is especially true as C&W’s rival carriers--WorldCom with its Digex acquisition and Sprint with its e-solutions initiative--enter the market, Chan said.

“There are a lot of new entrants and a lot of them are carriers. For [C&W] to be competitive, it’s important to have something like this in their portfolio.”