Verizon & Terremark: The Value of the Cloud Rises (VZ, TMRK, VMW, AMZN, MSFT, RAX, SVVS)

Verizon Communications, Inc. (NYSE: VZ) has agreed to acquire Terremark Worldwide, Inc. (NASDAQ: TMRK) in an all-cash deal worth about $1.4 billion. Verizon will pay $19/share for Terremark, which is no doubt good news for VMWare, Inc. (NYSE: VMW), which purchased 4 million shares of Terremark stock in 2009 for $5/share.

The deal will help Verizon expand its cloud-computing strategy, which the company calls ‘everything-as-a-service.’ That may be what the companies are saying now, but that is unlikely to be Verizon’s long-term strategy to replace its declining landline business. Terremark is on course to post a bigger net loss in its 2011 fiscal year than it did in 2009 and 2010. And Verizon is supposed to be counting on Terremark to make up for the phone giant’s own losses?

Terremark provides what is known as infrastructure-as-a-service (IaaS), that includes servers, data storage, and network bandwidth. These services are central to private cloud computing solutions, and Terremark, with a market cap of less than $1 billion, competes with the likes of Amazon.com (NASDAQ: AMZN) and Microsoft Corp. (NASDAQ: MSFT).

Verizon plans to keep Terremark’s management team intact, which is a surprise by itself. The company posted a net loss in 2010 of -$32 million. The year before that, the company lost -$11 million. So far in its 2011 fiscal year, which began in April 2010, the company has lost -$18 million. Why keep the management team that led to such sorry performance?

Just about the only good reason that comes to mind is that Terramark’s real estate is both valuable in its own right and an asset that Verizon can wring some profit out of once it dumps Terremark’s money-losing management.

Terremark owns 13 data centers around the world with a total of more than half-a-million square feet of space. Verizon gains data centers that can be used to provide cloud services, or to offer as co-location facilities to pump more data through the network. Data like streaming video.

Now that’s mere speculation at this point, but it’s hard to see why Verizon would buy Terremark just to keep things the way they are. Something else is happening here.

Terremark shares have jumped about 35%, to around $19 share, a new 52-week high. Terremark’s smaller competitors, like Rackspace Hosting, Inc. (NYSE: RAX) and Savvis, Inc. (NASDAQ: SVVS) have also set new 52-week highs this morning.

Paul Ausick