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Akamai Set to Buy Prolexic

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Akamai Technologies (AKAM) recently announced that it plans to acquire Prolexic Technologies for a net cash of $370.0 million. The transaction is expected to be completed in the first half of 2014.

Although the transaction will not have any effect on fourth-quarter 2013 guidance, it will negatively impact Akamai’s full-year 2014 non-GAAP earnings by approximately 6 cents to 8 cents. However, the acquisition is expected to boost organic revenue growth by 4.0%.

Prolexic develops cyber security software that protects data centers and enterprise applications from distributed denial of service (DDoS) attacks. DDoS is the most common form of cyber attack that uses a large number of computers to bring down the targeted network with huge traffic.

DDoS attacks can come at the network level or at the application level. According to an October report from Arbor Networks, DDoS attacks exceeding 20 Gbps have so far quadrupled in 2013 compared with the previous year.

Hackers have targeted large U.S. banks including Bank of America (BAC) and J.P. Morgan Chase (JPM) as well as media companies such as The New York Times and Washington Post.

Israel-based network security solutions provider Radware (RDWR) estimates that DDoS attacks cost negatively impacts financial services company an average of $32,560 per minute of downtime.

Akamai’s present security solutions including Kona site defender are focused on the application layer. The addition of Prolexic expands the company’s product offerings for non-web applications as well as enterprise data centers.

According to ABI Research, global cyber security spending in critical infrastructure areas is expected to increase $4.25 billion over 2012 to $46.0 billion in 2013. Further, as per research conducted by ReportsnReports.com, global cyber security spending is expected to reach $165.0 million by 2023.

We believe that this significant growth in spending bodes well for Akamai. The expanding product portfolio will help the company to grab significant cyber security market share in the long run. Moreover, Prolexic’s recurring revenue model will boost top line, going forward.

However, in order to differentiate its products, Akamai is significantly investing in research & development and is also expanding its sales force through new recruits. This additional spending coupled with the dilutive nature of the acquisition will hurt profitability in 2014.

Currently, Akamai has a Zacks Rank #3 (Hold).

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