Mergers & Acquisitions in the Web Hosting Industry Joe Bardenheier Endurance International Group, Inc. Hillary Stiff Cheval Capital, Inc.

Agenda Shameless self promotion of Cheval Market conditions Price vs. profits & risk Deal structure highlights Valuation Summary

Shameless self promotion of Cheval

Market conditions

Price vs. profits & risk

Deal structure highlights

Valuation

Summary

Cheval Capital, Inc. Who we are. Boutique investment bank that began working in the industry with Verio in 1996. Completed 80 Hosting and ISP acquisitions, 18 in 2006. Who we work for. Endurance International Group, Verio, Rackspace, Nextel, etc. Clearinghouse for smaller companies. What we do. Use our contacts, market knowledge & experience to get the best terms and increase the likelihood for success.

Who we are.

Boutique investment bank that began working in the industry with Verio in 1996.

Completed 80 Hosting and ISP acquisitions, 18 in 2006.

Who we work for.

Endurance International Group, Verio, Rackspace, Nextel, etc.

Clearinghouse for smaller companies.

What we do.

Use our contacts, market knowledge & experience to get the best terms and increase the likelihood for success.

Market Conditions - Multiples 2.5x – 7.0x 1.0x – 2.5x Multiple of Annual Revenue 2x – 4x 0.5x-1.2x x DN

Market Conditions – Future Multiples Hosting Transaction Multiples 1999 2006 Lower industry growth rates High churn Pricing pressure Noisy advertising environment No big new buyers Google, Yahoo, etc. No barriers to entry 10x 1x

Lower industry growth rates

High churn

Pricing pressure

Noisy advertising environment

No big new buyers

Google, Yahoo, etc.

No barriers to entry

Market Conditions – Deal Volume Sharp increase in numbers of buyers. Buyers looking to offset difficulties in organic growth (churn, advertising noise, etc.) More companies have matured and have the systems and management to do an acquisition. Most are small to medium sized hosters buying out of cash flow. Sharp increase in numbers of sellers. Customer base growth slows/stops/declines Burnout Static multiples

Sharp increase in numbers of buyers.

Buyers looking to offset difficulties in organic growth (churn, advertising noise, etc.)

More companies have matured and have the systems and management to do an acquisition.

Most are small to medium sized hosters buying out of cash flow.

Sharp increase in numbers of sellers.

Customer base growth slows/stops/declines

Burnout

Static multiples

Market Conditions – Buyer Types Consolidators Makes up the bulk of all buyers. Looking to add customers to their existing infrastructure. Concerned with profitability of acquired customers on their infrastructure. Platform/Strategic buyers Looking for a base of operations for a new product line or company. Concerned with systems, processes, network, employees & profitability.

Consolidators

Makes up the bulk of all buyers.

Looking to add customers to their existing infrastructure.

Concerned with profitability of acquired customers on their infrastructure.

Platform/Strategic buyers

Looking for a base of operations for a new product line or company.

Concerned with systems, processes, network, employees & profitability.

Price vs. Profits & Risk Price paid (and when) is a direct function of; How profitable the business is to the buyer; and How much risk there is of realizing that profit. Two examples 100% paid upfront in cash means more risk for the buyer and thus a lower price. 100% paid over time based on profits means more risk for the seller and thus a higher price.

Price paid (and when) is a direct function of;

How profitable the business is to the buyer; and

How much risk there is of realizing that profit.

Two examples

100% paid upfront in cash means more risk for the buyer and thus a lower price.

100% paid over time based on profits means more risk for the seller and thus a higher price.

Asset vs. Stock Deals Asset deals Buyer purchases specific assets from seller. Seller retains everything else including employees, debt, etc. Typically includes customers, url and, if it’s a dedicated or VPS deal, servers Preferred by consolidators. Stock or equity deals Buyer acquires all of the equity interests in the seller and takes over the entire company. More common with platform/strategic buyers who want all of the operations and people. Often more complex and risky than an asset deal.

Asset deals

Buyer purchases specific assets from seller. Seller retains everything else including employees, debt, etc.

Typically includes customers, url and, if it’s a dedicated or VPS deal, servers

Preferred by consolidators.

Stock or equity deals

Buyer acquires all of the equity interests in the seller and takes over the entire company.

More common with platform/strategic buyers who want all of the operations and people.

Often more complex and risky than an asset deal.

How do buyers pay? Equity interests of the acquiror Shares, LLC interests, etc. Assumption of liabilities Debt, leases (equipment, office and data center), etc. Cash Performance based earnouts, escrow, holdbacks, seller financing, etc.

Equity interests of the acquiror

Shares, LLC interests, etc.

Assumption of liabilities

Debt, leases (equipment, office and data center), etc.

Cash

Performance based earnouts, escrow, holdbacks, seller financing, etc.

When do buyers pay? Many possible options; Signing of the APA Migration of customers Holdback expiration Specific dates following closing Holdback issues Migration Breaches of “Reps and Warranties” & fraud Customer attrition (churn & inactive) Seller obligations for transition / migration Chargebacks & expenses

Many possible options;

Signing of the APA

Migration of customers

Holdback expiration

Specific dates following closing

Holdback issues

Migration

Breaches of “Reps and Warranties” & fraud

Customer attrition (churn & inactive)

Seller obligations for transition / migration

Chargebacks & expenses

Valuation I Multiples based on purchase price divided by historic revenues or revenues based on the seller’s current customer base. Calculating revenues based on the seller’s current recurring revenue base. 10,000 customers @ $10/mo x 12 = $1,200,000 15,000 customers @ $15/mo x 12 = $2,700,000 25,000 customers @ $25/qtr x 4 = $2,500,000 Total Annualized Revenues = $6,400,000. Non-recurring revenues often don’t count.

Multiples based on purchase price divided by historic revenues or revenues based on the seller’s current customer base.

Calculating revenues based on the seller’s current recurring revenue base.

10,000 customers @ $10/mo x 12 = $1,200,000

15,000 customers @ $15/mo x 12 = $2,700,000

25,000 customers @ $25/qtr x 4 = $2,500,000

Total Annualized Revenues = $6,400,000.

Non-recurring revenues often don’t count.

Valuation II Consolidating buyers concerned with their profitability, not the seller’s. Buyers look at a variety of things to determine profitability of seller’s revenues to them. Bandwidth usage ARPU Customer growth and churn rates Support & infrastructure intensity Assets used to produce revenues are not separately valued – they are part of the revenue valuation.

Consolidating buyers concerned with their profitability, not the seller’s.

Buyers look at a variety of things to determine profitability of seller’s revenues to them.

Bandwidth usage

ARPU

Customer growth and churn rates

Support & infrastructure intensity

Assets used to produce revenues are not separately valued – they are part of the revenue valuation.

Valuation III – Other Factors Control panel Billing cycles & Deferred Revenue Credit cards & information OS Equipment Data center lease Employees Type of hosting Products ARPU DNS Records

Control panel

Billing cycles & Deferred Revenue

Credit cards & information

OS

Equipment

Data center lease

Employees

Type of hosting

Products

ARPU

DNS

Records

Valuation IV - Financials Required level of financial detail increases with transaction size. Base requirement includes ability to track revenues, customers & servers. Inadequate financial reporting eliminates buyers and hurts valuations.

Required level of financial detail increases with transaction size.

Base requirement includes ability to track revenues, customers & servers.

Inadequate financial reporting eliminates buyers and hurts valuations.

Summary Good news Transaction values stable. More companies buying & selling. Transactions fairly easy to accomplish for mainstream sellers at market multiples. Not so good news Transaction values at risk if big players reduce industry profitability. Unique companies still more difficult to sell. Few large buyers.

Good news

Transaction values stable.

More companies buying & selling.

Transactions fairly easy to accomplish for mainstream sellers at market multiples.

Not so good news

Transaction values at risk if big players reduce industry profitability.

Unique companies still more difficult to sell.

Few large buyers.

Endurance International - Overview Founded in 1997 Backed by a $1 Billion private equity firm A leading provider of Web Hosting services to small and medium sized businesses Serving over 230,000 customers world wide Completed over 27 acquisitions in the last four years 24 hour customer support via e-mail, phone and chat Highly automated, Operational Support System (OSS) State of the art clustered Unix and Windows platform Can easily private - brand for its multiple properties and resellers Multiple brand strategy to reach certain market segments Proprietary, 350-step Migration Methodology

Founded in 1997

Backed by a $1 Billion private equity firm

A leading provider of Web Hosting services to small and medium sized businesses

Serving over 230,000 customers world wide

Completed over 27 acquisitions in the last four years

24 hour customer support via e-mail, phone and chat

Highly automated, Operational Support System (OSS)

State of the art clustered Unix and Windows platform

Can easily private - brand for its multiple properties and resellers

Multiple brand strategy to reach certain market segments

Proprietary, 350-step Migration Methodology

Example Brands

Endurance’s Acquisition Criteria Shared Hosting Companies/Assets with 5,000 – 400,000+ Subscribers; Growing customer base; Data consistency; Sites hosted on Unix and Windows platforms; Small business Subscribers; Hosting packages priced from $6 to $50 per month; Credit card billing preferred; Technical resources available to aid in migration; Subscriber-base/asset sale preferred.

Shared Hosting Companies/Assets with 5,000 – 400,000+ Subscribers;

Growing customer base;

Data consistency;

Sites hosted on Unix and Windows platforms;

Small business Subscribers;

Hosting packages priced from $6 to $50 per month;

Credit card billing preferred;

Technical resources available to aid in migration;

Subscriber-base/asset sale preferred.