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Exodus buys GlobalCenter to create Web hosting giant

Web hosting company Exodus Communications announces it will acquire rival GlobalCenter for $6.5 billion in stock.

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Exodus Communications today said it will acquire rival GlobalCenter for $6.5 billion in stock, creating a Web hosting powerhouse.

The board of directors at Exodus and GlobalCenter's parent company, international network operator Global Crossing, met last night to approve the deal. Similar talks between the two companies failed to reach a conclusion in July.

Exodus will issue a number of common equivalent shares equal to $6.525 billion divided by the average closing price of Exodus stock prior to the closing of the transaction, the company said. The transaction will be accounted for as a purchase and is expected to close in the first quarter of 2001, the companies said.

The combination puts to an end months of rumors and negotiations in the Web hosting sector. Reports of talks between Exodus and GlobalCenter fueled the stock market until they sputtered, when Digex entered the fray. Speculation abounded that GlobalCenter and Digex might align or Exodus could be interested in the company, until WorldCom agreed to acquire Digex three weeks ago for $6 billion.

Hosting firms, such as Exodus, GlobalCenter, Digex and AboveNet, provide secure "data center" facilities that house server computers, software applications and other infrastructure necessary for Internet services. Qwest Cyber.Solutions, Intel Online Services, Level 3 Communications and smaller companies such as Verio, PSINet and Concentric Network also provide Web and application hosting.

The hosting companies manage and maintain the equipment on behalf of their business customers, on a monthly, outsourced basis. The hosting market has helped give rise to new businesses such Internet content caching and distribution, and application service providers (ASPs).

Many analysts expect the hosting market to continue to grow as the number of Internet companies and services explodes over the next decade.

GlobalCenter was expected to offer shares in the company in an initial public stock offering (IPO) this year. But the souring stock market likely impacted the size of the deal Global Crossing executives could have secured.

Alternatives, such as a combination with Exodus, quickly surfaced.

Gartner analysts Eric Paulak and Ted Chamberlin say the acquisition of Global Crossing's Web hosting arm, GlobalCenter, will accomplish two things for Exodus Communications: it will make the company larger and change its approach to Web hosting.

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But some analysts believe the sale of its data center business is curious for Global Crossing, a so-called next-generation communications carrier. Many carriers are rapidly building data centers to help offset declining profits in their core voice businesses. For example, local phone giant BellSouth yesterday announced plans to expand into Web hosting.

The move, coupled with the sale of the company's small local phone business, raises questions about whether Global Crossing is simply narrowing its operational focus or preparing itself for a sale, analysts have said. see story: Global Crossing for sale?

The acquisition of GlobalCenter makes Exodus the largest hosting provider by far. It also gives Exodus a network it can use to deliver its hosting services. As part of deal, Global Crossing will become the network operator for traffic from Exodus' data centers.

GlobalCenter, which claims Yahoo, eToys, AskJeeves and others as customers, is one of the biggest Web hosting companies. GlobalCenter operates 11 data centers worldwide, serving more than 500 customers.

The combination quickly expands Exodus' assets, which include 22 data centers globally. Exodus serves 3,300 customers including eBay and Lycos.

But the company, which garnered revenue of $179.6 million during the second quarter, has never turned a net profit, according to a spokeswoman.