The concept of telecom and cloud computing convergence is again demonstrated by another major acquisition. Earlier this week, CenturyLink Inc. announced that it will be acquiring cloud provider, Savvis (news, site), for a total of US$ 3.2 billion in a cash, stock and debt deal. But there may be problems.

Increased Cloud Computing Capabilities

CenturyLink has offered a buyout of outstanding Savvis common stock for US$ 40 per share, in which shareholders will get US$ 30 per share in cash, and US$ 10 in CenturyLink common stock, for a total of US$ 2.5 billion. CenturyLink will also assume Savvis debt in the tune of US$ 700 million, which will either be refinanced or absorbed by the company.

CenturyLink’s acquisition is in line with its thrust to “achieve global scale as a managed hosting and co-location provider,” and will improve on its managed and cloud hosting capability. In effect, CenturyLink is buying into Savvis’ scalable cloud-computing products and services. Meanwhile, Savvis will benefit from CenturyLink’s existing telecommunications infrastructure.

Glen F. Post III, CenturyLink CEO and President, highlighted the synergy between the two companies' services.

Today, businesses are shifting the way they manage their information technology services and infrastructure, and this transaction helps us meet these needs by offering Savvis' leading products and services coupled with CenturyLink's network."

The combined CenturyLink and Savvis assets involve 48 datacenters across North America, Europe and Asia, with a 207,000 route mile fiber network and a 190,000 mile global access network.

Legal Issues

The planned CenturyLink-Savvis merger is not without its detractors, though. A Savvis investor has filed a lawsuit against the company, claiming that the US$ 2.5 billion offer is inadequate, and will result in a poor deal for shareholders. Hilary Kramer, a stockholder, has claimed that Savvis directors failed to execute due diligence by agreeing to a deal that essentially undervalues the company. The court filing claimed that Savvis did not “explore strategic alternatives” even in light of the “bright prospects” of cloud computing in today’s business environment.

Recent trading has seen Savvis shares as high as US$ 37.79 per share, which will result in a small premium for Savvis shareholders, should the deal push through. Furthermore, analysts have predicted a high of US$ 46 per share, with the company having an optimistic profit outlook in the short term.

The planned CenturyLink-Savvis merger and its ensuing legal issues are indicative that the cloud services market is maturing, and service providers will likely to be vying for a firm hold on the market. In particular, traditional IT service companies are likely to battle it out with newer entrants, such as CenturyLink, for dominance in this market.