Internap Corporation Board of Directors c/o Mr. Eric Cooney Chief Executive Officer One Ravinia Drive Suite 1300 Atlanta, GA April 24, 2015

Transcription

1 Internap Corporation Board of Directors c/o Mr. Eric Cooney Chief Executive Officer One Ravinia Drive Suite 1300 Atlanta, GA April 24, 2015 To the Board of Directors of Internap Corporation: RDG Capital Fund Management (together with its affiliates, RDG ) is a significant shareholder of Internap Corporation ( or the Company ). We believe management has implemented a highly effective corporate strategy and continues to execute well. However, notwithstanding its operational progress and recent share price appreciation, we believe Internap remains significantly undervalued. To remedy the Company s undervaluation, RDG strongly recommends that the Board retain a nationally recognized investment banking advisor to explore strategic alternatives to maximize shareholder value, including a potential merger or sale of the Company. Based on discussions with leading technology sector M&A investment bankers, RDG believes there are likely a number of potential strategic buyers who would be interested in acquiring Internap at a significant premium to its recent trading valuation. Based on M&A valuation multiples paid for comparable data center companies, RDG estimates the private market value of Internap in a merger or sale would be $16 $19 per share. INTERNAP IS SIGNIFICANTLY UNDERVALUED Notwithstanding solid execution of its business strategy offering hybrid infrastructure services to high performancedependent data center customers, Internap trades at a severe discount to publicly traded comparable companies. VALUATION COMPARISON INTERNAP vs PUBLICLY TRADED DATA CENTER PEERS Enterprise Value / 2015E Revenue Enterprise Value / 2015E EBITDA 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 2.6x 6.4x Data Center Peers 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 9.9x 14.3x Data Center Peers Note: Data center peers include CoreSite Realty Corp., CyrusOne Inc., Digital Realty Trust Inc., DuPont Fabros Technology Inc., Equinix Inc., InterXion Holding NV, QTS Realty Trust Inc. and Rackspace Hosting Inc. 1

2 Internap trades at an approximate 30% to 60% discount to the median EBITDA and revenue valuation multiples of its peers despite having a similar projected 3-year annualized EBITDA growth rate of 15%+. Internap also trades at a significant discount relative to the valuation multiples paid for comparable companies in prior data center industry M&A transactions. VALUATION COMPARISON INTERNAP vs PRECEDENT M&A TRANSACTION PEERS Enterprise Value / LTM Revenue Enterprise Value / LTM EBITDA 6.0x 5.0x 4.0x 5.2x 18.0x 16.0x 14.0x 12.0x 10.7x 16.0x 3.0x 2.7x 10.0x 8.0x 2.0x 6.0x 1.0x 4.0x 2.0x 0.0x Data Center M&A Peers 0.0x Data Center M&A Peers Note: reflects estimated LTM EBITDA as of 6/30/15. Data center peer average reflects M&A transactions in excess of $1 billion. Whereas acquirers of comparable data center companies have paid an average 5.2x LTM revenue and 16.0x LTM EBITDA, Internap trades at just 2.7x estimated LTM revenue and 10.7x estimated LTM EBITDA based on Q estimates. Furthermore, we believe Internap is even more undervalued than it appears on the surface for several reasons. First, Internap has a significant net operating loss carryforward (NOL) of more than $200 million; this tax benefit is not captured in the above comparison of EBITDA multiples but further contributes to the Company s undervaluation. Second, because Internap currently operates at only 60% capacity utilization, trailing EBITDA significantly understates the Company s potential EBITDA at 80-90% capacity utilization, which more closely approximates the peer group average. Lastly, we believe Internap s discounted valuation does not properly reflect the Company s advantageous competitive position operating company-controlled data centers that provide high-performance, hybrid services to blue chip customers for whom internet infrastructure performance is business-critical. We believe this competitive differentiation mitigates Internap s risk of industry-wide pricing pressure compared to lower value-add competitors offering commoditized services. INTERNAP IS UNDERVALUED BECAUSE IT IS STILL VIEWED AS A LEGACY IP SERVICES & CO-LOCATION BUSINESS RATHER THAN THE HIGHER-MARGIN, FASTER-GROWING MANAGED HOSTING & CLOUD SERVICES PROVIDER IT HAS BECOME Internap trades at a perennial discount to its data center peers notwithstanding significant improvement in the Company s revenue mix in favor of higher-margin, faster-growing managed hosting and cloud services relative to its legacy co-location and IP services. As the chart below indicates, Internap has increased its higher-margin, faster-growing data center services as a percentage of total revenue from 51% to 72% in the past several years. 2

3 INTERNAP HAS INCREASED ITS HIGHER-MARGIN, FASTER-GROWING DATA CENTER SERVICES AS A PERCENTAGE OF REVENUE 2009A Revenue Composition 2014A Revenue Composition IP Services 28% IP Services 49% Data Center Services 51% Data Center Services 72% In recent years, Internap has also significantly increased its higher-margin company-controlled core data center usage for hosting and cloud services while de-emphasizing lower-margin partner co-location data center services. As a result, both Internap s EBITDA and EBITDA margin have steadily increased. The Company s EBITDA has grown at a 23% compound annual growth rate while its EBITDA margin has improved from 10.9% to 23.5% during the past five year period. Notwithstanding its successful operational transformation, however, Internap trades at the lowest revenue and EBITDA valuation multiples in the publicly traded data center industry peer group. We believe Internap s steadily improving EBITDA margin and double-digit EBITDA growth should justify valuation metrics similar to its industry peers, and the Company s improving fundamentals should also justify higher valuation multiples relative to its past. Yet, the charts below reflect a contradictory story. Notwithstanding the significant improvement in its operating performance, Internap s EBITDA multiple to EBITDA margin ratio is actually lower today than it was five years ago due to the fact that the Company s EBITDA multiple has not improved commensurately with its EBITDA margin improvement. INTERNAP TRADES AT A LOWER EBITDA MULTIPLE TO EBITDA MARGIN RATIO TODAY THAN IT DID 5 YEARS AGO NOTWITHSTANDING SIGNIFICANT IMPROVEMENT IN ITS EBITDA MARGIN LTM EBITDA Margin LTM EBITDA Multiple / LTM EBITDA Margin 30.0% % 20.0% 23.5% % 10.0% 5.0% 10.9% % 2009A Recent A Recent 3

4 Furthermore, although Internap has been improving its EBITDA margin significantly more than the data center industry peer group median, Internap trades at a lower EBITDA multiple relative to its peers today than in the past. INTERNAP TRADES AT A LOWER EBITDA MULTIPLE RELATIVE TO ITS PEERS TODAY THAN IN THE PAST NOTWITHSTANDING ITS SIGNIFICANTLY GREATER EBITDA MARGIN IMPROVEMENT 10.0% 8.0% 6.0% Cumulative EBITDA Margin Improvement ( E) 5.8% 15.0x 12.0x 9.0x EBITDA Multiple Comparison 12.3x 12.4x 9.9x 14.3x 4.0% 2.0% 1.9% 6.0x 3.0x 0.0% Data Center Peers 0.0x E Data Center Peers Although we estimate Internap is projected to increase its EBITDA margin by approximately 390 basis points more than the data center peer group over the period E, Internap s 2015E EBITDA multiple is actually lower than its historic EBITDA multiple, while the peer group s 2015E EBITDA multiple is higher than its historic EBITDA multiple. The EBITDA multiple discount between Internap and its peer group median has worsened by approximately 30% and the difference between the EBITDA multiple of Internap and its peer group median has widened from -0.1x to -4.4x during this time period. Paradoxically, this widening EBITDA multiple discount has occurred despite the fact that Internap s estimated EBITDA growth rate is higher than its peer group median. INTERNAP TRADES AT A DEEPER EBITDA MULTIPLE DISCOUNT RELATIVE TO ITS PEERS TODAY THAN IN THE PAST NOTWITHSTANDING ITS SIGNIFICANTLY GREATER EBITDA GROWTH RATE EBITDA CAGR ( E) Internap EBITDA Multiple as a % of Peer Group Median EBITDA Multiple 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 26.0% 16.7% 125.0% 100.0% 75.0% 50.0% 25.0% 99.0% 69.5% 0.0% Data Center Peers 0.0% E 4

5 In summary, Internap has traded at a persistent discount to its industry peers for most of the past five years. Despite its operational outperformance, Internap paradoxically trades at a larger discount to its peers today than it has in the past. Notwithstanding Internap s industry-leading EBITDA margin expansion and superior EBITDA growth rate, Internap s EBITDA multiple has actually contracted while its peer group median EBITDA multiple has expanded. INTERNAP S PERSISTENT UNDERVALUATION REQUIRES THE BOARD S IMMEDIATE ATTENTION Given Internap s persistent undervaluation despite five consecutive years of demonstrable operational improvement, we believe it is both timely and necessary for the Board to take proactive measures to unlock shareholder value by exploring strategic alternatives, including a potential merger or sale of the Company. We believe Internap remains undervalued in part due to its ongoing transformation but also because of its relatively small market capitalization, lack of Wall Street research coverage and trading illiquidity. A sale or merger of the Company would resolve these deficiencies. INTERNAP IS A HIGHLY ATTRACTIVE ACQUISITION CANDIDATE AND THERE ARE COMPELLING REASONS FOR ITS SALE OR MERGER AT THIS TIME The Current M&A Environment is Highly Favorable Recent data center industry M&A transactions such as Zayo Group s acquisition of Latisys Corporation at 15.3x LTM EBITDA and Telecity Group s acquisition of Interxion Holding NV at 16.4x LTM EBITDA reflect a highly favorable M&A market environment in which data center acquirers are willing to pay attractive valuation multiples. Internap is a Desirable Acquisition Size Given its moderate size, Internap would be an attractive acquisition for many prospective acquirers. We estimate Internap would have an acquisition value of approximately $1.4 billion, which fits well within the $300 million to $3 billion range of previously completed data center industry acquisitions. By comparison, the average market cap of many potential data center acquirers is greater than $5 billion, making an acquisition the size of Internap quite feasible. Acquisition Debt Financing is Readily Available The availability of debt financing at historically low interest rates makes the acquisition of a strong operating company such as Internap feasible to finance, especially for many prospective strategic acquirers that are large, under-leveraged companies with substantial borrowing capacity. Many of these potential acquirers also have a significant amount of cash available to use for acquisitions and their common shares trade at high valuation multiples, which treasury stock can be issued for merger transactions. Data Center Industry Consolidation is Underway Internap is well-positioned as an attractive niche acquisition candidate within a data center industry which remains highly fragmented and ripe for consolidation. According to Gartner research, the 3 largest players in the data center industry, Amazon Web Services, Equinix and Rackspace, combined account for less than 15% of the total market. Recent industry acquisitions reflect the competitive need for data center operators to consolidate through acquisition in order to improve operational efficiency, extend geographic coverage and expand services to meet customer requirements. As an acquisition candidate, Internap fulfills all these acquisition criteria. 5

6 Internap has Company-Controlled Data Center Coverage in Major U.S. Markets Internap s geographically diversified company-controlled data centers make the Company attractive to both domestic and foreign acquirers seeking to establish a U.S. market presence. As an example, for an acquirer such as UK-based Telecity Group plc, which has carrier-neutral data centers that offer co-location and related services in Europe but lacks a U.S. presence, Internap s data center locations throughout the U.S. would provide an attractive, cost-effective turnkey solution. Internap s Core Data Center Revenue Growth is Strong and Accounts for the Majority of its Revenue With core data center services now accounting for the majority of Internap s revenue and EBITDA, the Company has become a very saleable asset to other data center operators. According to recent Gartner research, the addressable markets for the Company s managed hosting and cloud services are projected to grow annually 18% and 37%, respectively. As these services continue to grow faster than the Company s legacy IP services, Internap s revenue growth will likely accelerate and become even more focused on data center services, making Internap particularly attractive to growth-oriented data center acquirers. Internap Provides a Solution to Potential Acquirers Looking to Expand Hybrid Internet Infrastructure Services Some potential acquirers with limited service capabilities have already commented publicly on the growing importance of being able to provide the type of hybrid services offered by Internap. Therefore, by acquiring Internap, monolithic data center landlords or limited service providers could expedite their time to market a broader array of services and improve customer retention. Internap has State of the Art Company-Controlled Data Center Facilities A strategic acquirer which does not control its own data center facilities could also benefit from owning Internap s 16 company-controlled facilities to reduce dependence on third party-managed data centers, and thereby improve both its customer service and operating margins. Internap s company-controlled data centers feature industry-leading power densities which would also appeal to potential acquirers seeking a technological competitive advantage. Internap has Market Leading Technology Internap s highly skilled R&D team, credited with developing leading edge internet infrastructure technologies, would also be a valuable asset to an acquirer. In particular, Internap s industry-leading cloud services have been compared favorably to commodity public cloud providers. According to independent research firm Cloud Spectator, Internap s internally developed bare-metal cloud service offers better performance, consistency and value when compared to similar cloud configurations for larger competitors such as Amazon and Rackspace Hosting. As further evidence of its technological capability, Internap has also been the recipient of the 2014 North American Cloud Services Competitive Strategy Innovation and Leadership award presented by independent research firm Frost & Sullivan. Within a larger organization, Internap s industry-leading R&D effort could generate even more revenue per R&D dollar spent. Internap has Recurring Revenue and a Highly Attractive Customer Base A strategic acquirer would also find highly attractive Internap s large and diversified base of 12,000 customers, including high performance-dependent, blue chip clients such as HBO, Lions Gate Entertainment, Nintendo and BlueCross BlueShield. Internap s ability to maximize the speed and minimize the downtime of its customers applications is a key competitive differentiation which caters to business customers for whom internet infrastructure performance is business-critical. As a result of providing superior performance, we believe Internap is less susceptible to industry-wide price erosion and potential margin compression faced by lower value-add competitors offering commoditized services. Because many of its blue chip customers are signed to multi-year contracts, Internap also benefits from a highly predictable stream of recurring revenue which would appeal to prospective acquirers. 6

7 Strategic Acquirers have a Lower Cost of Capital Given the capital-intensive nature of providing data center managed hosting and cloud services, many potential acquirers larger in scale than Internap would benefit from a lower cost of capital. We estimate larger prospective acquirers have an approximate 300 basis point lower cost of debt financing compared to Internap. Hence, by refinancing Internap s outstanding debt, a creditworthy strategic acquirer could potentially reduce the Company s interest expense by approximately $10 million per year. Internap has High ROI and its Free Cash Flow is Projected to Grow Significantly Potential acquirers would also be attracted to the substantial increase in Internap s projected free cash flow following the Company s recently completed new market development phase. The Company s increasingly success-based capital expenditure plan offers 30%+ expected returns on invested capital at decreasing risk as a significant percentage of capex will only be spent when a customer signs up for services. This high return/low capital allocation risk, together with an expected decline in capital expenditure intensity overall, makes the Company appealing to ROI-disciplined acquirers. Strategic Acquirers have a Larger Salesforce to Accelerate Utilization of Available Data Center Capacity Operating at approximately 60% capacity utilization with a relatively modest salesforce, it will take some time for Internap to optimize its data center capacity utilization. By contrast, a large acquirer with a substantially greater salesforce could absorb Internap s under-utilized capacity more quickly and thereby substantially increase EBITDA on an expedited basis. We calculate such an acquirer could generate an incremental $100 million in cumulative EBITDA by compressing the time period to achieve optimal data center capacity utilization. Strategic Acquirers can Cross-Sell Internap s Proprietary IP Technology and Hybrid Services A large acquirer of Internap could also cross-sell the Company s patented IP route optimization technology and hybrid data center services to a broader base of existing customers. Because of the low customer acquisition cost associated with cross-selling, an acquirer could increase both revenue and profitability from its existing customer base. Depending on its size and current scope of services, we estimate a potential acquirer could conservatively generate in excess of $25 million in incremental annual EBITDA from such cross-selling opportunities. A Strategic Acquirer can Eliminate Substantial Costs In addition to the synergies described above, we estimate a strategic acquirer could also significantly reduce the estimated $82 million Internap spends annually on sales, marketing, general and administrative costs. Assuming redundant costs could be pared 40%, a strategic acquirer could generate nearly $35 million in incremental annual EBITDA. This amount of annual cost savings would represent approximately 10% of Internap s revenue, which we believe is in line with other data center industry M&A transactions. There are Substantial Projected Synergies for a Strategic Acquirer of Internap In summary, we believe a strategic acquirer of Internap could realize potential one-time data center capacity optimization EBITDA benefits of approximately $100 million, annual interest expense savings of $10 million, annual operating cost savings of $35 million, and annual cross-selling synergies of $25 million. Capitalizing annual cost savings and cross-selling synergies at a data center industry peer median EBITDA multiple of 14.3x and adding one-time capacity utilization benefits results in nearly $960 million, or more than $16 per share, in potential M&A synergy benefits. For illustrative purpose, splitting evenly such synergy benefits would allow a strategic acquirer to justify paying Internap shareholders a premium of at least 70%, or at least $8 per share, conservatively ascribing no value to the many other strategic benefits an acquirer could derive. 7

8 ($ in millions, except per share amounts) Potential EBITDA Synergies for a Strategic Acquirer of One-Time Synergies Accelerated Data Center Capacity Optimization Benefit $100.0 One-Time Synergies $100.0 Capitalized Value of Annual Synergies Annual Cost Savings $35.0 Annual Cross-Selling Benefits 25.0 Annual Cost Savings and Cross-Selling Benefits $60.0 Capitalized at Peer Median Multiple 14.3x Capitalized Value of Annual Synergies $857.5 Total Capitalized Value of Synergies $957.5 Fully-Diluted Shares 58.9 Total Capitalized Value of Synergies / Share $16.26 % Allocation to Internap 50.0% Per Share Synergies Allocated to Internap $8.13 Recent Share Price Internap M&A Value per Share $18.52 Premium / (Discount) to Recent Share Price 78.2% Source: Company filings and RDG Capital estimates. An Acquisition of Internap could be Accretive to Many Potential Acquirers Based on our analysis, a strategic buyer who acquires Internap for approximately $18.50 per share and realizes the estimated synergies we have identified would effectively be paying only 8.7x pro forma 2015E EBITDA, which is well below both the public peer median multiple of 14.3x 2015E EBITDA and the median multiple of publicly traded potential acquirers of 9.4x 2015E EBITDA. Accordingly, we believe such a transaction could be accretive to many potential acquirers of Internap. There is a Long List of Potential Acquirers of Internap Given the Company s moderate size, attractive assets, significant undervaluation and the substantial synergies a strategic acquirer could realize, we believe there is a long list of at least two dozen highly qualified potential acquirers of Internap, including each of the larger publicly traded companies listed below. Logical prospective suitors include co-location, hosting and cloud service providers as well as ISP/Telecom service providers that provide connectivity and storage solutions such as the following: Co-location, Hosting and Cloud Providers Equinix, Inc. Rackspace, Inc. Amazon Web Services Telx Group, Inc. / ABRY Partners / Berkshire Partners CyrusOne Inc. ISPs/Telecom Service Providers AT&T Inc. Sprint Corporation Verizon Communications Inc. Level 3 Communications, Inc. Akamai Technologies, Inc. 8

9 Co-location, Hosting and Cloud Providers (continued) Softlayer (IBM) QTS Realty Trust, Inc. Digital Realty Trust DuPont Fabros Technology Telecity Group plc Q9 Networks / EdgeConneX / Providence Equity Partners Vantage Data Centers / Silver Lake Partners Peak 10, Inc. / GI Partners ISPs/Telecom Service Providers (continued) Consolidated Communications Frontier Communications Corp. Windstream Holdings, Inc. Cox Communications, Inc. Comcast Corp. Zayo Group, LLC Time Warner Cable Inc. Cogeco Cable Inc. CenturyLink, Inc. DATA CENTER INDUSTRY M&A TRANSACTIONS As the table below indicates, there have been numerous M&A transactions in the data center industry in recent years. Given its strong competitive position, attractive customer base, superior patented technology, increasing EBITDA margin and double digit EBITDA growth, we believe Internap deserves a valuation in line with these historical M&A transactions involving companies of approximately equal average size. ($ in millions) Close Enterprise LTM Date Acquirer Target Value Revenue EBITDA Pending Telecity Group Plc Interxion Holding NV 2, x 16.4x 2/23/15 Zayo Group Holdings, Inc. Latisys Corp. (1) x 15.3x 7/8/13 IBM Corp. SoftLayer Technologies, Inc. (1) 2, x 12.5x 4/3/13 Cogeco Cable Inc. Peer 1 Network Enterprises Inc x 17.1x 7/15/11 CenturyLink, Inc. SAVVIS, Inc. 3, x 13.8x 4/21/11 Time Warner Cable Inc. NaviSite, Inc x 11.2x 4/11/11 Verizon Communications Inc. Terremark Worldwide, Inc. 1, x 21.0x 6/11/10 Cincinnati Bell Inc. Cyrus Networks LLC (1) x 12.5x 5/3/10 Equinix Inc. Switch & Data Facilities Co x 15.1x 10/24/08 ABRY Partners LLC Q9 Networks Inc x 18.8x Average - All 5.1x 15.4x Average - 1BN+ 5.2x 16.0x Notes: Source: Company filings, Factset, Bloomberg and RDG Capital estimates. All figures in USD. (1) Estimated. 2.7x 10.7x 9

10 Based on the foregoing, we recommend the Board promptly engage a nationally-recognized investment banking advisor to explore all strategic alternatives to maximize shareholder value, including a merger or sale of the Company. We believe a transaction could reasonably be announced in Q3 or Q and accordingly be based on Internap s LTM revenue and EBITDA as of the end of Q2 2015, which we estimate would be approximately $336.6 million and $85.9 million, respectively. Applying a peer median M&A multiple of 5.2x LTM revenue and 16.0x LTM EBITDA implies Internap could have a buyout value in excess of $20 per share. Even applying a conservative discount to the M&A peer median EBITDA and revenue multiples, Internap would still have an implied buyout value of $16 to $19 per share. THE IMPLIED VALUATION OF INTERNAP BASED ON PRECEDENT M&A TRANSACTIONS IS $16 $19 PER SHARE ($ in millions, except per share amounts) LTM Data Center Industry Financial as of Precedent M&A Metric Q2 2015E Transaction Multiple Value Revenue $ x $1,734.9 Premium / (Discount) (1) (15.0%) Aggregate Value $1,474.7 Debt & Capitalized Lease Obligations (359.0) Cash & Cash Equivalents 22.7 Equity Value $1,138.3 Fully-Diluted Shares 59.0 M&A Value per Share $19.29 Recent Price $10.39 Premium / (Discount) to Recent Price 85.7% LTM Data Center Industry Financial as of Precedent M&A Metric Q2 2015E Transaction Multiple Value EBITDA $ x $1,371.1 Premium / (Discount) (2) (5.0%) Aggregate Value $1,302.5 Debt & Capitalized Lease Obligations (359.0) Cash & Cash Equivalents 22.7 Equity Value $966.2 Fully-Diluted Shares 58.6 M&A Value per Share $16.48 Recent Price $10.39 Premium / (Discount) to Recent Price 58.6% Notes: Source: Company filings and RDG Capital estimates. (1) Discount reflects moderately lower revenue growth rate relative to industry peers. (2) Discount reflects moderately lower EBITDA margin but similar EBITDA growth rate relative to peers. 10

11 LEADING TECHNOLOGY SECTOR M&A INVESTMENT BANKERS AGREE THAT INTERNAP IS A HIGHLY DESIRABLE ACQUISITION CANDIDATE THAT WOULD LIKELY ATTRACT MANY POTENTIAL SUITORS As part of our research in preparing our recommendation to the Board, we have consulted with leading technology sector M&A investment bankers who have significant experience in the data center industry. These leading technology sector M&A investment bankers agree with our assessment that Internap is a highly desirable M&A candidate that would likely attract interest from multiple potential suitors. Based on these discussions, we are confident Internap could command an attractive buyout price for its shareholders. CONCLUSION In conclusion, we believe it is both necessary and timely for the Board to address the perennial undervaluation of the Company. RDG strongly recommends that the Board retain a nationally recognized investment banking advisor to explore all available strategic alternatives to maximize shareholder value, including a potential merger or sale of the Company. For the many reasons we have outlined, RDG believes Internap is a highly attractive acquisition candidate. Furthermore, RDG has independently confirmed our assessment with leading technology sector M&A investment bankers who have significant data center industry experience. As a leading operator of company-controlled data centers providing hybrid services to high performance-dependent customers, Internap would be attractive to many potential strategic acquirers looking to extend their service offerings, expand their geographic coverage, and improve their operational efficiency via substantial cost savings and cross-selling synergies. Given its relatively small market capitalization and illiquid stock, Internap does not truly benefit from being a stand-alone publicly traded company. A sale or merger would resolve this condition. As a significant shareholder of Internap we believe it is important for the Board to act swiftly. A decision to delay a sale or merger may have unintended adverse consequences. For example, (i) if interest rates begin to rise as many economists forecast, acquirers will have higher borrowing costs and may be less willing to pay the same buyout premium, (ii) if Internap is not available to be acquired, competitors may develop their own hybrid services and no longer need to acquire the Company, and (iii) if the currently robust M&A market for data center companies begins to subside, acquisition multiples may also recede. RDG believes a prompt sale or merger of Internap would eliminate these risks and allow shareholders the opportunity to realize the Company s private market value which we estimate to be between $16 and $19 per share. We respectfully welcome the opportunity to discuss our views to enhance shareholder value with you. Sincerely, Russell D. Glass Managing Partner 11

12 About RDG Capital Fund Management New York-based RDG Capital Fund Management ( RDG ) is a private investment firm founded by Russell Glass, the former President of Icahn Associates. RDG manages investment funds which primarily focus on undervalued companies with identifiable catalyst opportunities to enhance shareholder value. Important Disclosures Any views expressed herein represent the opinions of RDG, whose analysis is based solely on publicly available information. No representation or warranty, express or implied, is made with respect to the accuracy, timeliness or completeness of the information contained herein. RDG expressly disclaims any and all liability based, in whole or in part, on such information, any errors therein or omissions therefrom. Any opinions expressed herein are subject to change without notification. Forward looking statements involve certain risks and uncertainties and assumptions. Actual results may differ materially from those contained in forward looking statements. RDG does not assume any obligation to update, correct or revise the information contained herein. RDG intends to review its managed funds investment in the Company on a continuing basis and may from time to time and at any time in the future depending on various factors, including, without limitation, the outcome of any discussions referenced above, the Company s financial position and strategic direction, actions taken by the Board, price levels of the Company s shares, other investment opportunities available to RDG, conditions in the securities market and general economic and industry conditions, take such actions with respect to its managed funds investment in the Company as it deems appropriate, including, without limitation: (i) acquiring additional shares and/or other equity, debt, notes, other securities, or derivative or other instruments that are based upon or relate to the value of the shares or the Company in the open market or otherwise; (ii) disposing of any or all of such securities or instruments in the open market or otherwise; or (iii) engaging in any hedging or similar transactions with respect to such securities or instruments. Figures may represent estimates of RDG or third parties and may not be indicative of future results. There is no assurance or guarantee with respect to the prices at which any securities of the Company will trade, and such securities may not trade at prices that may be implied or stated herein. The estimates and pro forma information set forth herein are based on assumptions that RDG believes to be reasonable, but there can be no assurance or guarantee that actual results will not differ materially. The information contained herein does not recommend the purchase or sale of any security nor is it an offer to sell or a solicitation of an offer to buy any security. Furthermore, the information contained herein is not intended to be, nor should it be construed or used as, investment, tax or legal advice. No representation or warranty is made that RDG s investment process or investment objectives will or are likely to be achieved or successful or that RDG s managed funds investments will make any profit or will not sustain losses. Past performance is not indicative of future results. Nothing contained herein should be taken as any form of commitment on the part of RDG to take any action in connection with any particular security. RDG and its affiliates are in the business of buying and selling securities. They have, and may in the future, buy, sell or change the form of their position in the Company or any security for any or no reason whatsoever. RDG has neither sought nor obtained the consent from any third party to use any statements or information contained herein that have been obtained or derived from statements made or published by such third parties which RDG may not be able to independently verify. Any such statements or information should not be viewed as indicating the support of such third parties for the views expressed herein. Furthermore, RDG makes no representations or warranties as to the accuracy, timeliness or completeness of such information. 12