Exodus, Global Crossing build Web powerhouse

Exodus has agreed to acquire Global Crossing's Web hosting unit for $6.5 billion, creating a hefty hosting concern with grand aspirations for new professional and managed Internet services.

The deal may serve to temporarily put an end to months of rumors and shakeout in the growing industry for outsourced Internet hosting services. Recent deals between Japan's NTT and Verio, WorldCom and Digex parent Intermedia Communications, and now the Exodus purchase of GlobalCenter, have reshaped the market.

Already there is some speculation about what the mergers will mean for competitors such as Intel Online Services, NaviSite and Data Return, among other independent Web hosting firms.

For now, one thing is clear: Exodus, with 32 data centers and nearly 4,000 customers once the deal closes early next year, is the 800-pound gorilla of the hosting sector.

In an interview with CNET News.com, Exodus Communications chief executive Ellen Hancock and Global Crossing CEO Leo Hindery discussed the deal, their failed talks in July and why they think the combination will be good for business.

CNET News.com: Exodus is already the largest Web hosting firm. Why did you feel the need to do this deal?
Hancock: We've always said we'd be interested in the right asset at the right price at the right time, and we think this is it. There were three aspects to this deal.

First, the data centers themselves. We respect what (GlobalCenter has) done. They've got some facilities in places where we could use space. They have data centers in some cities where we have not yet entered. For example, they are in Amsterdam. We've expressed an interest in Amsterdam. They'll get us in there quickly. They have data center space in California, Chicago, Boston and Manhattan. We've always wanted to go to Manhattan.

Certainly there are synergies there, and some overlap, and we'll eliminate the overlap.

Second, we are currently a customer of Global Crossing. We've gotten more and more comfortable with their ability to provide bandwidth. We want to make sure we're getting the best price each year. Now with this deal, a 10-year commitment, we get the best price every time we go to Leo...There's no way that Exodus could get this much bandwidth, at this pricing level, without some sort of deal like this one.

In addition to that, some of our competitors talk about the advantage of being 'on Net.' With this particular transaction, Leo has agreed to run fiber into every single one of our data centers, essentially putting us on the Global Crossing network.

The third deal is we agreed to establish a (joint venture) in Asia. We'll own 67 percent of the (joint venture). Global Crossing will own 33 percent. It brings us into their partnership with Microsoft and Softbank, and that's good for us.

And finally, across all three deals, the notion that Leo has almost 2,000 salespeople who will now be incented (sic) to sell the Exodus hosting offerings.

Why is this a good deal for GlobalCenter and Global Crossing? Wasn't GlobalCenter supposed to go out as an IPO?
Hindery: What GlobalCenter was going to be was a realization of value for the Crossing shareholders; that was the agenda. And I simply concluded that in an industry that is full of scale and breadth, that Ellen is the finest steward of this space in the Valley. And I've been frank--we've been chasing in her wake since we tried to re-energize GlobalCenter. And I think we've done a good job at it. But I also think she's very capable, that I have decided that my Global Crossing shareholders would be better off owning roughly 20 percent of Ellen's company than their own public company.

I'm a believer in breadth and scale. And that would have been enticing, but not enticing enough without this partnership between Crossing and what I call new Exodus...For me, I sell several billion dollars worth of network services to a company that we're a substantial shareholder of, and I think it's a win-win.

To what extent did the WorldCom-Intermedia Communications deal for Digex play into bringing Exodus and Global Crossing back to the table? Both of your companies were rumored to be in partnership and merger talks with Intermedia and Digex. What happened?
Hindery: We did confirm that we looked at (Digex). Crossing was going to do a deal around Digex and Intermedia, and it didn't happen.

Did that spur the discussions that resulted in this deal to combine Exodus and GlobalCenter?
Hindery: Not at all.

Hancock: I would say these are two very different deals...The Digex deal could not have included this type of bandwidth relationship, and it certainly would not have included the Asia Global Crossing joint venture.

How is this deal different from the one that collapsed between your companies two months ago?
Hindery: I think in hindsight, it's a very complicated deal, and I think we pushed it too fast last time. We needed to learn more about each other, and we did that over the course of July to September. It's the right deal at the right time, and July was the right deal at the wrong time.

How will this deal position the company vs. other competitors and what sorts of new businesses, such as managed hosting services, will you now offer?
Hancock: First of all, today Exodus does have a fair amount of managed service offerings. One out of three of our customers works with us on things like tape back up. We have 800 professional services people, 200 of them are security experts, so we've already been working in that space.

What this allows us to say, though, is that we're really strong in our core businesses...What's left is to go back in and focus ourselves on being more aggressive in that managed service space. We believe this frees up our teams to now go back and dedicate ourselves to spending the next year or so addressing that managed services space in a very aggressive way.