Global Crossing Rejects Exodus’ $6.5-Billion Bid for Web-Hosting Unit
Global Crossing Ltd. during the weekend rejected an offer from Exodus Communications Inc. to buy its Web-hosting business for more than $6.5 billion in stock, according to a person close to the negotiations.
Talks between the two communications companies broke down Saturday night after Global Crossing executives declared the price inadequate, largely because the company expects to raise at least $6.5 billion through a pending public offering of “tracking” shares in the Web-hosting business, called GlobalCenter, the source said.
It was unclear whether Exodus, an Internet services company, would continue to pursue the deal, or whether other suitors would emerge for Global Crossing’s GlobalCenter subsidiary.
For now, however, Global Crossing appears focused on finishing preparations for the GlobalCenter tracking stock. The company must finish the requisite paperwork and win shareholder approval, but nonetheless hopes to complete the stock sale in mid-August.
Under a tracking stock arrangement, Global Crossing would sell about 25% of the equity in GlobalCenter to the public, but the unit would not be a stand-alone company and would remain inextricably tied to the fortunes of the parent firm.
Bermuda-based Global Crossing, which has executive offices in Beverly Hills, acquired the GlobalCenter unit last year through its merger with long-distance company Frontier Communications. The subsidiary is based in Sunnyvale, Calif., and is one of the leading companies in the red-hot business of handling other companies’ Internet sites, a practice known as Web hosting.
That’s why industry analysts were caught by surprise when news of a potential deal with Exodus leaked out last week. Many see advantages to Global Crossing maintaining ownership of a Web-hosting business, as a complement to its main business of providing international telecommunications services through its extensive fiber-optic network, which carries Web data.
But apparently, negotiations with Exodus included securing long-term agreements for Global Crossing to carry Exodus data traffic on its network, as well as to allow Global Crossing to keep a 25% stake in the Web-hosting unit.
Wall Street was buoyed by such potential terms and drove up Exodus shares $6.06 on Friday to close the week at $55.25 in Nasdaq trading, up almost 40% from Monday’s close of $39.75. Global Crossing shares also rose on Nasdaq, finishing the week at $33, up from Monday’s close of $27.06.
GlobalCenter is the third-largest firm in the Web-hosting business, after market-leader Exodus and second-place Verio Inc., according to figures from International Data Corp. IDC estimates that the Web-hosting business will become a $17.6-billion market in the U.S. in 2004, up from $1.7 billion last year.
With so much money flowing into Web hosting, nearly all the major telecommunications companies have laid plans to capture some of the business. The growing crowd of companies in the business--as well as the capital-intensive nature of Web-hosting--has analysts watching for an eventual shakeout in the field.
Santa Clara, Calif.-based Exodus has been on a acquisition tear and as a result has a commanding lead over its nearest rivals, with $242 million in 1999 revenue and double the number of data centers operated by GlobalCenter. The company maintains and operates Web sites for more than 2,000 customers, compared with GlobalCenter’s more than 500 customers.
Still, Exodus does not own a fiber-optic network and must pay other communications companies for space on their networks. Exodus has clinched long-term deals with WorldCom, Qwest and Global Crossing.
Under an August 1999 deal with Global Crossing, Exodus agreed to purchase network capacity and maintenance worth as much as $105 million over 25 years. As of March 31, Exodus had spent about $24 million of that, according to a company report.
If Exodus and Global Crossing were to regroup and complete a GlobalCenter deal, Exodus could potentially gain new customers and reach, and at the same time get low-price transportation over Global Crossing’s network.
GlobalCenter has been losing money steadily as it invests to expand its network of data centers, posting a loss of $170 million on 1999 sales of $71 million. The unit has about 600 employees and will expand to 20 data centers worldwide by the end of the year.
