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Exodus rises, then falls, on takeover talk

Shares of Exodus Communications gain ground, then slide, on rumors that Cable & Wireless will buy the Web hosting company.

Shares of Exodus Communications gained on takeover rumors, but at least one analyst downgraded the stock based on concerns about growth.

Britain's Sunday Telegraph reported that British company Cable & Wireless was considering buying Exodus as part of a campaign to expand internationally. The paper said Exodus was valued at $4.7 billion.

Shares touched a high of $11.14 before slipping to close down 10 cents, or 1 percent, to $9.87.

Exodus provides Web hosting services that let businesses outsource the management of their Internet sites. It runs about 20 Internet data centers where clients store servers in secure vaults.

Those data centers were of concern to U.S. Bancorp Piper Jaffray analyst Cary Robinson, who said that the company had denied permission for visits.

"When visiting the data centers of other hosting companies, we found one empty and others lightly utilized," Robinson wrote, adding that "we believe the growth in the total number of servers connected to the Internet has slowed to zero."

"We are concerned that a lengthening enterprise sales cycle and implosion of the dot-com bubble has led to a more significant weakening of Exodus' customer base than we had previously anticipated," he wrote. "We believe an industry price war will occur during 2001 in order to drive facility utilization higher."

Robinson lowered his rating on the stock from "strong buy" to "neutral" and cut revenue estimates for 2001 from $1.96 billion to $1.56 billion. He dropped his price target on the stock from $50 to $6.

Lehman Brothers analyst Harry Blount had a different spin on that concern; he said investors should begin to buy the stock, provided the company clears itself of bad news during its first-quarter earnings release later this week.

"If Exodus reports weak bookings and brings down 2001 revenue guidance to street consensus, it will 'clear the decks' of further bad news. Under this scenario, we would suggest investors become more aggressive in purchasing the stock, despite lack of future visibility," he wrote.

However, he did caution that investors should watch out for the possibility that the company reports weak bookings but does not lower revenue estimates because "it is apparent the Street is not giving the company any credit for the current guidance."

Exodus is expected to report first-quarter results Thursday. First Call consensus is for a loss of 28 cents per share on revenue of $354 million.

Exodus recently announced plans for a secondary stock offering and convertible bond offering that should bring in $800 million, which the company said would be enough to fund it through 2003, when it hopes to post a profit.