As Internap Shares Plunge, is There an M&A Upside?

Last year, Internap Corp. hired Morgan Stanley to “evaluate strategic alternatives,” but despite the move, the second half of 2015 was a painful one for its shareholders, and the situation hasn’t improved this year, which has so far brought a 38-percent plunge in value. This is happening with the backdrop of numerous analysts being bullish on data center stock in general.

Internap shares have traded down over 55 percent during the last 12 months, with the share price decreasing 38 percent during the first three weeks of 2016 alone. During the past 52 weeks, INAP has traded in a range of $3.59 – $10.75 per share.

Last week, its shares hit a new 52-week low of $3.59 per share, prior to the 4-percent bounce on Friday up to $3.93 per share. This has resulted in Internap sporting a market capitalization in the $220 million range.

There is a number of players who may be willing and able to write a check that size, if they can look at the company from the glass-half-full perspective. But the recent global equities sell-off, spurred by China fears and the oil glut, may have potential suitors thinking twice about making acquisitions.
Analyst: M&A Likely to Continue

As reported by Benzinga in late November 2015, SunTrust Robinson Humphrey analyst Inder Singh initiated data center stock coverage with a positive view of the space, noting that data center traffic is expected to grow by a compound annual growth rate of 23 percent through 2019, when it will reach as much as 10.4 zettabytes per year, citing stats from the latest Cisco Cloud Index.

Looking forward to 2016, “Singh suggested that M&A activity in the space will continue for two reasons: 1) wholesale and retail colocation companies are looking to expand their service offerings to become a ‘one-stop shop’ that can attract clients of all types and sizes, and 2) scale and size is important to attract enterprises that operate across many geographical regions.”

Singh’s top data center stock picks included Equinix and CyrusOne. He initiated Internap with a Neutral rating and a $7.50 target price.
Mr. Market – Why the Long Face?

Internap operates in a fast-growing sector with remarkable cloud-driven tailwinds. Most Wall Street analysts are bullish about the prospects for the data center industry overall.

Since 2014, Internap has been transitioning its business to focus more on hybrid cloud services in addition to its legacy IP and colocation hosting business.

Notably, during last year’s third quarter, the strategic partnership with Akamai Technologies to deliver cloud security solutions to Internaps’s high-performance customers was “…beginning to show results,” according to Internap’s earnings presentation.

However, the company faces a lot of heavyweight competition: Amazon Web Services, Microsoft Azure, Google Cloud Platform, IBM SoftLayer, Equinix, Rackspace, Telx (now part of Digital Realty), CenturyLink, IBM Softlayer, AT&T, Verizon Communications, and Level 3 Communications, among others.