Monday, May 14, 2001

Digital Island
to be bought for
$340 million

Cable & Wireless offers
$3.40 a share for the
former isle Internet firm

Star-Bulletin news services

LONDON >> Honolulu-founded Internet firm Digital Island will be bought for $340 million by British telecoms company Cable & Wireless Plc, the companies said today.

Cable & Wireless is offering $3.40 in cash for each share in the San Francisco- based company, which runs Web sites for companies requiring a high degree of interactivity. The purchase price includes $49 million of net debt.

On completion of the acquisition, Digital Island will become its wholly owned subsidiary, headquartered in San Francisco and led by its current management team.

That is an 8.7 percent premium to Friday's closing price of $3.13, but a fraction of Digital Island's high of $148 a share in December 1999, before last year's dot-com crash. The stock rose 26 cents today to $3.39.

Digital Island reported $104.6 million of revenue for the last 12 months and has about 80.2 million shares outstanding.

It announced a second-quarter loss of $1.19 billion last week after writing off more than $1 billion in assets. It is cutting its work force by 20 percent.

The acquisition is expected to accelerate the implementation of C&W's strategy of providing an increasing proportion of value-added services to business customers, the company said.

Shares of Cable & Wireless rose 5 cents to $19.57 today on the New York Stock Exchange.

Cable & Wireless dipped into its war chest to buy the struggling Digital Island, underlining its reluctance to return its $8.5 billion cash pile to shareholders.

The British company, which is under pressure from shareholders to announce a special dividend with Wednesday's annual results, said the deal would boost its Web site hosting business.

The takeover is the biggest step yet in C&W's plan to spend its cash on Internet-related acquisitions in the United States and Asia.

It is transforming itself into a global Internet services company after selling more mature operations in Hong Kong and Australia.

Analyst James Enck of Daiwa questioned whether C&W should be buying a Web hosting business when U.S. giant Exodus Communications Inc had recently scaled back its expansion plans, signalling doubts about demand for hosting.

"It's bright to be consolidating at a time of eroded values but if the global leader is sending such a signal of caution and concern about the prospects for hosting I'm not sure the market is going to welcome this," he said.

C&W said the acquisition was expected to be earnings dilutive in the near term, but would enhance them by the end of the third year.

Enck said it would dilute earnings before interest, tax, depreciation and amortization at C&W's core Global division by 33 percent in the current year.

C&W Chief Executive Graham Wallace has refused to return $8.5 billion in net cash to shareholders, although people familiar with its plans say the firm might do so if it could not find suitable acquisitions.

Some shareholders want it to return cash, but at least one of C&W's largest investors backs the company's acquisition plan.

"By combining the innovations of Digital Island with the world class IP (Internet Protocol) network and financial backing of Cable & Wireless, Digital Island gains renewed momentum," said Digital Island Chairman and Chief Executive Ruann Ernst.

Digital Island's customers include E-TRADE, UBS Warburg,, Sony Corp, Cisco and Microsoft.

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