C&W to snatch up Exodus

Battered Web hosting firm Exodus Communications Inc., which filed for Chapter 11 bankruptcy protection in September, has sold most of its assets to U.K. telecoms operator Cable & Wireless PLC for US$575 million and the assumption of about $180 million in liabilities.

The deal is good news for Exodus customers because it ends months of uncertainty and puts Exodus' assets in the hands of a parent with deep pockets, analysts say.

Dan Leichtenschlag, CTO at Sportsline.com, which collocates about 450 servers in three Exodus data centers, says he's pleased with the news.

"It's definitely good to get closure," Leichtenschlag says. "And a company like Cable & Wireless, which is large and has the resources to solve all their problems and continue the high level of service that we've gotten over the last three or four years is obviously a positive thing."

The news marks the end of an era in the hosting market, analysts say, as stand-alone hosting providers face mounting debt and an eroding customer base. Exodus was saddled with $3.5 billion in debt after building a network of 44 data centers. In addition, analysts note, because Exodus did not own any network assets, it spent much of its resources on multiple high-speed connections to its facilities. C&W, with a global Internet network, won't face those expenses.

"The writing has been on the wall for a long time that Internet data center operations as a standalone business doesn't have a whole lot of margin for error," says Joel Yaffe, an analyst at Giga Information Group. "The carriers missed an opportunity, but now they're able to take advantage of their financial resources and buy up assets dirt cheap."

The planned acquisition is the latest grab for C&W, which acquired managed hosting provider Digital Island in May for $350 million. That acquisition added 10 data centers to C&W's 23 existing facilities (eight of which are Web hosting centers). The Exodus purchase, which includes 30 Exodus data centers and some 3,500 customers, "will immediately bring [C&W] into the forefront of the Web hosting industry," says Jay Slattery, an analyst with Technology Business Research.

C&W pegs its deal with Exodus - which includes 4 million square feet of space in 26 data centers in the U.S., two in London and one each in Tokyo and Frankfurt - at $850 million, about $100 million more than the value Exodus announced. C&W spokesman Peter Eustace says the difference exists because "we've included absolutely everything that could come our way as a liability."

It wasn't clear which data centers will remain open after Exodus shuts an undisclosed number of facilities in the coming months.

Rumors circulated earlier this year that C&W was eyeing Exodus before its Digital Island acquisition. Eustace would not comment on those rumors, but acknowledged the delay has put C&W in a better buying position. "What Chapter 11 has allowed us to do is to select the assets that best fit with what we have so that we can create - when the businesses are combined - an optimum portfolio," Eustace says.

Senior Editor Denise Pappalardo contributed to this report.

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