A leading telecom company Verizon Communications Inc. (VZ) purchased 59.8 million shares at $19.00 per share under its $1.1 billion tender offer to acquire information technology service company, Terremark Worldwide Inc. (TMRK). With the completion of the tender offer, Verizon now has approximately 71% stake in Terremark.
Verizon will commence a second tender offer to acquire the remaining shares. This offer will expire on April 7.
In January 2011, Verizon announced its proposal to acquire of Terremark through a tender offer, which commenced between February 10 and February 17, 2011.
The transaction was approved by the board of both companies and Terremark’s shareholders. After the acquisition, Terremark will operate as a subsidiary of Verizon, retaining its own name and management team.
The acquisition represents Verizon’s enthusiasm to rapidly enter the market that delivers corporate IT services over the Internet rather than an in-house IT department. Verizon is seeking to expand its advanced business in order to offset declining revenues from traditional fixed lines. The deal supports Verizon growth initiative in remote or cloud computing, an area in which it has been lagging competitors like AT&T Inc. (T).
We expect Verzion’s growth prospects to be strong driven by new customers, higher smartphone adoption, fourth generation (4G) Long Term Evolution mobile broadband network and the sale of Apple Inc.’s (AAPL) iPhones in February, which led to revenue growth. However, Verizon may spend considerably to promote the iPhone this year, thereby hurting its margins in the short term. Further, the offerings of various devices including smartphones that support the 4G network would strengthen Verizon’s position compared to Sprint Nextel Corp. (S), which was the first to launch 4G smartphone handsets nationwide in 2010.
However, persistent erosion in access lines as well as intense competition from cable companies and other alternative services providers may be the downside. In addition, the 4G infrastructure may be an obstacle if other service providers shift to different generation technologies.
We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.
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