A four-bagger for VMware

Contact: Brenon Daly

If the virtualization thing doesn’t work out for VMware, the company could always spin off a hedge fund. At least that’s what we’ve been thinking as Verizon Communications’ purchase of Terremark Worldwide appears set to close very soon. When the deal does wrap, VMware will walk away with a tidy windfall from a savvy bet that the virtualization kingpin made on the hosting provider back in mid-2009.

Recall that in May 2009, VMware picked up a 5% stake in Terremark for $20m, paying just $5 for each of the four million shares. According to terms, that block of equity will be worth $76m when it comes time to cash out to Verizon, which is paying $19 for each Terremark share. A four-bagger in just a year and a half is a return that might even make John Paulson envious. The gain on VMware’s investment in Terremark even outpaces the return of its own highflying stock, which has ‘only’ tripled in that time.

Peer 1 in hosting hookup

by Brenon Daly, Philbert Shih

In what was pretty much a straight customer acquisition play, Canadian hosting provider PEER 1 Hosting said Thursday that it has picked up Atlanta-based VIA Net.Works USA. Although terms were not disclosed, the purchase of VIA Net.Works, which had $2m in trailing revenue, is almost certainly in the low single digits of millions of dollars. With the deal, PEER 1 has acquired just under 200 dedicated and managed hosting customers, which generate about 80% of total revenue. The remaining 20% of revenue comes through a base of shared hosting customers. PEER 1 has not yet decided what to do with these customers, but it is a good bet that they will be sold. VIA Net.Works’ customer base consists of SMBs that are basically all hosted on the Windows platform, although VIA Net.Works does support Linux.

The deal continues a relatively healthy flow of transactions in the hosted/managed services market. While overall tech M&A spending last year dropped by half, both the number and value of deals in the hosted/managed services sector actually ticked up in 2009. We saw some 83 deals worth $2.1bn in 2009, up from 77 deals worth $1.6bn in 2008. The pace picked up throughout the year, with two-thirds of the transactions announced in the second half of 2009. We recently published a summary of a Tier1 Research report on M&A activity in the sector. To purchase a copy of that report, click here.

M&A activity in the hosted/managed services market

Year Deal volume Deal value
2009 83 $2.1bn
2008 77 $1.6bn
2007 84 $2.7bn
2006 88 $1.9bn

Source: The 451 M&A KnowledgeBase