Update: Inktomi to Buy FastForward in $1.3 Billion Stock Deal - TheStreet

Update: Inktomi to Buy FastForward in $1.3 Billion Stock Deal

It would have taken Inktomi two years to develop the technology FastForward currently has.
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Updated from 3:20 p.m. EDT

Inktomi

(INKT)

, an Internet infrastructure company, announced Wednesday that it would acquire

FastForward Networks

, a developer of live online broadcast technology, in an all-stock deal valued at $1.3 billion.

The acquisition of privately held FastForward would give Inktomi a big advantage in the Internet broadcast realm, a market ripe for growth, and it enables the Foster City, Calif.-based company to expand on its strengths -- powering searches and alleviating traffic on the Web.

"We saw the opportunity for the transformation of the Internet as a whole," Richard Pierce, executive vice president of Inktomi, said in an interview. While video streaming on the Web today remains "fairly rough," Pierce said, more sophisticated technology, like the kind provided by FastForward, will make the phenomenon an integral part of the Internet.

"It's like what audio transmission over the Internet was a few years ago," Pierce noted.

FastForward, aligned with

Real Networks

(RNWK) - Get Report

and

Digital Island

(ISLD)

, among other streaming video purveyors, seeks to overcome some of the deficiencies that have plagued online video broadcasts, most notably the live fashion show of lingerie company

Victoria's Secret

in 1999.

A bevy of technical problems -- spurred by a surge of Web users who wanted to see scantily clad supermodels -- overshadowed the historic significance of the online broadcasting feat.

Formed in 1998, FastForward boasts that with its technology, it has largely solved the problems manifested in the Victoria's Secret broadcast, an effort that "crashed and burned," Abhay Parekh, co-founder and chief executive of FastForward, said in a conference call with analysts Wednesday.

A crisp and clear online broadcast of a football game between the

University of Nebraska

and

San Jose State University

, delivered on a recent weekend by Digital Island, shows how far the streaming technology has come, Parekh said.

David Peterschmidt, the chief executive of Inktomi, said in the conference call that it would have taken two years for his company to develop the technology FastForward currently has in place. Cleanly delivered online video is vitally important, he added. "If confronted with a poor video or audio experience, users will go elsewhere," he said.

FastForward first became a potential acquisition target about six months ago, Inktomi's Pierce said. On FastForward's side, meanwhile, executives were enjoying their autonomy. "We wanted to go all the way. We were having a blast," Parekh said in an interview. But in the end, an alliance became a more attractive prospect.

"They had a very similar vision of how to go after a huge set of customers," Parekh added. "It just made a lot of sense to talk more seriously."

Finally, Inktomi said Wednesday it would hand over 11.9 million shares of its stock for all FastForward shares, options and warrants it does not already own. Inktomi made an investment in FastForward in April as part of a $30 million round of financing. The companies now hope to complete the deal by the end of the year.

In fiscal 2001, the deal is expected to add $35 million to $40 million to revenue, although it will cut into Inktomi's earnings during the first two quarters, Pierce said. But the company will remain profitable, and the agreement ultimately will increase earnings per share, Pierce said.

Once the two sides complete the transaction, FastForward, based in San Francisco, will be folded into Inktomi's operations, becoming a media division, one of five Inktomi business units, Pierce said. All 75 FastForward employees are expected to join the combined company.

The deal failed to impress some investors, however. Inktomi finished Wednesday trading down $2.25, or 2%, at $108.75.

One analyst, Katherine Egbert of

Thomas Weisel Partners

, said it's likely some investors are worried about the deal's anticipated effect on profits in the first two quarters of fiscal 2001. She said the firm has not done any underwriting for Inktomi.

Although the companies face a challenging integration process, Egbert said the agreement will help Inktomi strengthen its goal of providing services that will benefit Web users and generate revenue for customers.