Savvis Inc, a subsidiary of leading telecom service provider CenturyLink, Inc. (CTL), has acquired assets of CIBER, Inc.’s (CBR) IT Outsourcing (:ITO) business. The deal includes sale of assets to Savvis, including CIBER’s contracts, infrastructure, technology and facilities related to ITO business in North America, Europe and India. In exchange, Savvis paid $6 million in cash to CIBER and will pay additional purchase consideration, depending on its financial performance through December 2013.
Formerly, in 2011, Savvis entered into a reseller contracts with CIBER, a global provider of IT solutions. Following this agreement, the acquisition of assets is expected to benefit Savvis’ existing business in application-management services and help-desk support.
In addition, Savvis would gain access to client and vendor base. These clients were already being served through Savvis’ 50 data centers across the globe, supported by CenturyLink’s network platform.
We believe that CenturyLink is gaining significant momentum in the enterprise market with the introduction of Savvis’ product lines. The acquisition of Savvis has not only resulted in revenue accretion but also expanded CenturyLink’s reach beyond conventional market of core local phone business.
Over the past years, CenturyLink’s phone business has registered a constant decline. This is evident from the consistent decline in its access lines on an organic basis. The reason behind this is the displacement of traditional wireline telephone services by wireless and other competitive offerings. Further, soft economic conditions in the company’s service territory also continue to contribute to the cascading effect.
Although the company is working on a number of initiatives to curtail the access line losses, it remains far from realizing much of the benefits that would support its business growth. Meanwhile, the company has gained from industry consolidation of profitable acquisitions — Qwest and Savvis.
Coming back to Savvis, the acquisition of this company has well marked CenturyLink’s entry into the cloud computing business, which is growing by leaps and bounds. CenturyLink currently has expanded its footprint in the hosting managed cloud services business to 50 data centers in North America, Europe and Asia.
The company continues to expand data centers this year with an aim to generate higher revenue growth in managed hosting and cloud services. These acquisitions bequeathed several additional benefits like greater scale of operations and increasing productivity, besides providing the company with a competitive edge over its larger peers like AT&T, Inc. (T) and Verizon Communications Inc. (VZ).
However, stiff competition from other low cost telecom operators like LEAP Wireless International Inc. (LEAP) and increased operating expenses resulting from the acquisitions may impede the company’s growth trajectory.
We maintain our long-term Neutral recommendation on CenturyLink. However, the stock has a Zacks #2 Rank, implying a short-term (1-3 months) Buy rating.
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