Cable & Wireless plugs US gap

Digital Island builds on C&W's internet backbone in the US

Cable & Wireless has used some of its cash pile to plug a gap in its global operations by buying the struggling US web services firm Digital Island for $340m in cash.

C&W said the deal would boost its offerings in internet content delivery, managed hosting and web services.

The acquisition comes as C&W faces increasing pressure from shareholders to give back some of its estimated £7bn cash mountain.

The cash has been raised from a number of sell-offs, including the sale of its Optus subsidiary in Australia to Singapore Telecommunications in March.

Some of its institutional investors are eager to access the cash to enable them to take part in British Telecom's record-breaking £5.9bn discounted rights issue.

But C&W chief executive Graham Wallace is said to be reluctant to return cash to shareholders during the current downturn in tech and telecom stocks.

The announcement of the Digital Island deal comes just ahead of C&W's annual results on Wednesday, when shareholders will be looking for further news on what the company plans to do with its cash.

Island life

Digital Island is a leading provider of managed internet services - also known as web-hosting - to large companies in the finance, media, entertainment and high tech industries.

Its services include content delivery and network services that allow people visiting one of the sites to download information as quickly as possible.

Its customers include E-TRADE, UBS Warburg, FT.com, Sony, Cisco Systems and Microsoft.

C&W has been looking for a web-hosting company in the US to complement the internet backbone it bought from MCI after its merger with Worldcom.

Last week Digital Island announced a second quarter loss of $1.19bn after writing off more than $1bn in assets. It is cutting its workforce by a fifth.

Where it fits

C&W said it expected the deal to reduce earnings in the short term but would start paying returns in three years.

The two firms expect a range of benefits including reduction of Digital Island's network costs and from cross-selling products between their existing customers.

Digital Island will be integrated into C&W's Global division from which it cut more than 4,000 jobs in March.

Shares in C&W, which have lost more than half of their value since the beginning of this year, fell 1.1% in the London market following the news of the acquisition.