Verizon Climbs Onboard the Cloud; Brilliant Move or Foolish Mistake?

Shortly after market open on August 25, Verizon VZ acquired a small, private company called Cloudswitch. As inferred by its name, Cloudswitch is involved in the cloud computing space, making it an attractive target for Verizon.

To learn more about the acquisition's potential implications, Benzinga reached out to Joe Bonner of Argus Research. Bonner maintains a 'buy' rating on Verizon. According to Bonner, "many telecom companies are trying to get into the cloud. It is not surprising at all that Verizon wanted to follow suit and modernize its business."

Dissenters may claim that companies should physically store data in their own facilities; otherwise, security risks are too apparent. However, in current economic conditions, cloud computing may offer companies appealing incentives. Bonner mentioned that "enterprise cloud technologies afford companies significant cost savings. The technology has been around long enough such that systems can perform up to par. In fact, my own firm has transitioned to the cloud as well."

From a strategic standpoint, Verizon's shareholders should benefit from the synergies resulting from the acquisition. The company is able to cut costs while expanding the services that it offers to its clients, so the balance sheet may very well expand positively.

While the transaction makes theoretical sense, there is always the possibility that Verizon bought an overvalued company. After all, many investors believe another technology bubble is on the horizon, given the extreme popularity that social networking has experienced.

Currently, the deal's terms and conditions are unknown. However, as Bonner points out, "the cloud computing space has seen a feeding frenzy. As many companies and investors are placing bets on the cloud, it is hard to say if Cloudswitch was overvalued during negotiations, especially with the lack of information."

The evidence is mixed concerning Verizon's acquisition, and investors are currently in the dark regarding specific deal points. As cloud computing becomes more prevalent in corporate America, some people are claiming that it may be overvalued. Verizon may or may not have made a good decision, only time will tell.

Verizon is currently down 1.5% for the session, trading at about $35.90.