Update: Exodus to Buy Global Crossing Unit in $6.5 Billion Stock Deal

Updated from 2:08 p.m. EDT

By acquiring Global Crossing's(GBLX) Web hosting unit and bolstering ties with the telecommunications service provider, Exodus Communications(EXDS) hopes to penetrate corners of the global market more rapidly than it could on its own.

In addition to buying the division in a stock pact valued at $6.5 billion, Exodus said Thursday that it would blend its Internet hosting resources with Global Crossing's Asian operations to capture a bigger piece of the pie in that region. Exodus said it would own two-thirds of the joint venture.

Shifting its gears toward other geographic areas, the Santa Clara, Calif.-based Web site manager is betting on even stronger demand in Asia, as companies, along with their customers, increase their dependence on the Internet to make business transactions.

Riyad Said, an analyst at Friedman Billings Ramsey & Co., suggested that Exodus would be able to capitalize on Global Crossing's presence in Asia to serve clients more quickly, a task that is growing even more vital in the competitive Web hosting industry.

"The U.S. has been a big market," Said noted. "But there's a lot of pent-up demand elsewhere. One of the benefits of this deal is being able to move into Asia and expand their footprint there."

Exodus presently has a single Web hosting center in Tokyo and has ambitious plans to extend its reach into the Asia-Pacific region, especially Singapore, China and Australia, said Maureen O'Connell, a company spokeswoman.

The move to form the biggest Web hosting firm builds on those designs, yielding a "significant time-to-market advantage in providing Web hosting services, which should attract multinational customers at an accelerated pace," said Ellen Hancock, chairman and CEO of Exodus.

As Web sites proliferate, a stronger global infrastructure will be needed to support the activity online, said Jeanne Schaaf, an analyst at Forrester Research. Added Web hosting centers around the world, she said, will make Internet experiences "richer and speedier" for consumers.

"The world is becoming smaller because of the Internet," Schaaf said. "You don't have to have a Yahoo! (YHOO) site based in Japan. But you might want your servers in Japan to have a better experience."

Web hosting centers house servers that manage Web sites and facilitate electronic-commerce transactions, and their proximity to the companies relying on them is important. For instance, more than half of all European Web traffic moves via U.S. servers, reducing the quality of service for some European Internet users, noted Andrew Parker, a Forrester analyst in Amsterdam.

Others, like London-based carrier Cable & Wireless and Qwest Communications of Denver, also seek to seize opportunities in Asia, analysts said. For now, though, Qwest is focusing on building Web hosting centers in the U.S. and Europe, through deals with IBM.

Exodus also said Thursday it would make Bermuda-based Global Crossing its primary network provider for 10 years, agreeing to buy from the company at least half of its network needs outside of Asia. Global Crossing, in return, would give Exodus "preferred pricing" on network services.

In July, talks to strike a similar deal collapsed. This time, however, the two were able to move ahead with a partnership expected to create substantial cost savings. If they consummate a deal by early 2001, as planned, Global Crossing would own a roughly 17% stake of Exodus.

For Exodus, combining Global Crossing's network with its own Web hosting centers is critical in a market ripe for further growth. The Web hosting market in the United States is expected to reach $20 billion in 2004, Forrester Research estimated.

A spate of consolidation, moreover, has added pressure. Earlier this month, long-distance provider WorldCom(WCOM) said it would buy Intermedia Communications, gaining control of the company's Web hosting company Digex in an agreement worth roughly $6 billion in stock and debt.

And in another union last spring, Nippon Telegraph & Telephone of Japan said it would acquire Verio, an American Web hosting company. Nippon Telegraph, analysts said, also is looking for a stronger grip on the Asian Web hosting market.

In the future, "only a handful of companies will have what it takes to succeed," Hancock of Exodus told reporters in a conference call Thursday.

Shares of Global Crossing closed up $2, or 7%, to $31.88, while Exodus fell $4.13, or 8%, at $49.13.

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