Akamai buying Israeli co Cotendo

Four years after its founding, Israeli company Cotendo is being sold to US company Akamai (Nasdaq: AKAM) for some $300 million.

Cotendo was founded by three former employees of Commtouch Software Ltd. (Nasdaq: CTCH; TASE: CTCH): Ronni Zehavi, who is CEO of the company, Udi Trugman and David Drai. The company provides acceleration and content distribution services for large websites and mobile carriers. Since it was founded, it has raised $39 million from, among other sources, the Sequoia, Benchmark, and Tenaya funds, which will post tenfold returns on their investments.

Following the acquisition, Akamai will set up a research and development center in Israel, to be named after its American-Israeli founder Daniel Lewin, who was killed in September 2001 aboard American Airlines flight 11, which crashed into the World Trade Center in New York.

"First and foremost, this is a great achievement for the company's 100 workers, who have done an extraordinary job," Zehavi said in an interview with "Globes" today. "We built a superb technology, and within a short time we have managed to reach 450 customers, among them some of the biggest companies, such as Facebook, Zynga, and Twitter."

For the excited Zehavi, the acquisition is recognition of Cotendo's innovative technology. "If a story is needed to encourage other entrepreneurs to go out and fund companies, our story can be an excellent example. We were three entrepreneurs, and we came to Haim Sadger at Sequoia on the basis of a presentation only. Sequoia were the first to believe in the company."

How will the exit affect the employees?

Zehavi: "Cotendo's employees will find their places as employees of Akamai, and thus we will continue to grow. Akamai, like Apple, Microsoft, and Intel, understands that there is substantial talent in Israel, and that there is an ability to innovate here that is not found elsewhere, not even in the US. Today, it's important for global companies to be players here."

Through joining up with Akamai, Cotendo will serve 20% of all the Internet users in the world. "The company will continue to grow, and more entrepreneurs will come out of it in the future, who will found other innovative and interesting companies. That will form the infrastructure for building a large high-tech industry in Israel," says Zehavi.

Cotendo has been unusually modest. Despite its success, it did not raise too much money, or rent large offices. It is located in Kfar Netter, a moshav near Netanya,. It annual sales are estimated at some $30 million.

Sequoia Capital partner Haim Sadger told "Globes" today: "We're happy and proud. We invested in the company when it was no more than a presentation. After less than four years, it has reached the stage of a successful acquisition. That's not bad."

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For Sequoia, this is in fact a phenomenal success in Israeli terms. The fund held 30-35% of Cotendo, and will receive a payback of about $100 million on an investment of $10 million. That's about half Sequoia's latest fund earmarked for Israel. The other investors have also made profits. Benchmark, which owned 20-25%, will receive $60-70 million, while Tenaya, the venture capital arm of what was Lehman Brothers, will receive about $40 million.

A few months ago, despite being several orders of size smaller than Akamai, which has 90% of the global Internet content distribution market, Cotendo sued Akamai, alleging infringement of a patent. The lawsuit will presumably be dropped with the acquisition.

Under terms of the agreement, Akamai will acquire all of the outstanding equity of Cotendo in exchange for a net cash payment of approximately $268 million , after expected purchase price adjustments, plus the assumption of outstanding unvested options to purchase Cotendo common stock.

"As we look to accelerate growth across the dynamic landscapes of cloud and mobile optimization, we are excited to be joining forces with Cotendo," said Paul Sagan , president and CEO of Akamai. "Cotendo's technology, partnerships and people are a strong complement to Akamai. Together, we believe there is tremendous opportunity for our combined technologies as enterprises embrace the move to the cloud and seek solutions for an increasingly mobile world."

Published by Globes [online], Israel business news - www.globes-online.com - on December 22, 2011