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"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205
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"Mergers & Acquisitions in the Web Hosting Industry" Joe Bardenheier & Hillary Stiff, HostingCon 2007 Panel #205

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Joe Bardenheier & Hillary Stiff did a talk at HostingCon 2007 on M&A in the web hosting industry. Hillary's part of the presentation covered the first 13 slides and Joe's covered the last three …

Joe Bardenheier & Hillary Stiff did a talk at HostingCon 2007 on M&A in the web hosting industry. Hillary's part of the presentation covered the first 13 slides and Joe's covered the last three slides.

Published in: Economy & Finance, Technology
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  • 1. Mergers & Acquisitions in the Web Hosting Industry Joe Bardenheier Endurance International Group, Inc. Hillary Stiff C HEVAL C APITAL , I NC .
  • 2. Agenda <ul><li>Cheval Capital, Inc. </li></ul><ul><li>Valuation Methodology </li></ul><ul><li>Multiples - Historical, Current and Projected </li></ul><ul><li>Terms - Price Versus Risk </li></ul><ul><li>Factors in Valuation </li></ul><ul><li>Deal Volume </li></ul><ul><li>Summary </li></ul>C HEVAL C APITAL, I NC.
  • 3. C HEVAL C APITAL , I NC . <ul><li>Who we are </li></ul><ul><ul><li>Investment bankers active in hosting/ISPs since 1996. </li></ul></ul><ul><ul><li>Completed over 92 Hosting/ISP acquisitions, 20 in 2006 and 11 YTD in 2007 including Endurance/iPowerWeb. </li></ul></ul><ul><li>Who we have worked for </li></ul><ul><ul><li>Endurance Int’l Group, Verio, Rackspace, Nextel, etc. </li></ul></ul><ul><li>What we do </li></ul><ul><ul><li>Represent buyers & sellers of hosting, telecom and related companies. </li></ul></ul><ul><ul><li>Distribute a weekly deal listing with over 30 sellers, creating a deal marketplace for small and mid sized companies. </li></ul></ul>C HEVAL C APITAL, I NC.
  • 4. Valuation I <ul><li>Generally quoted as a multiple of recurring revenues. </li></ul><ul><li>Multiples can be calculated based on historic recurring revenues; trailing twelve months or trailing six/three months annualized. </li></ul><ul><li>Multiples typically calculated on current annualized recurring revenue basis. </li></ul><ul><li>Non-recurring revenues are typically not included or if included will be calculated at a lower multiple with payments made post close. </li></ul><ul><li>Some acquirors, notably platform, focus more on EBITDA/Cash Flow of seller. </li></ul>C HEVAL C APITAL, I NC.
  • 5. Annualized Recurring Revenue <ul><li>Annualized Recurring Revenue is the most commonly used revenue base for valuation purposes. </li></ul><ul><li>Illustration of how to calculate Annualized Recurring Revenue. </li></ul><ul><ul><li>10,000 customers @ $10/mo x 12 pmts = $1,200,000 </li></ul></ul><ul><ul><li>15,000 customers @ $15/mo x 12 pmts = $2,700,000 </li></ul></ul><ul><ul><li>25,000 customers @ $25/qtr x 4 pmts = $2,500,000 </li></ul></ul><ul><ul><li>3,000 customers @ $100/yr x 1 pmt = $ 300,000 </li></ul></ul><ul><ul><li>Total Annualized Revenues = $6,700,000 </li></ul></ul>C HEVAL C APITAL, I NC.
  • 6. Market Conditions – Buyer Types <ul><li>Consolidators </li></ul><ul><ul><li>Makes up the bulk of all buyers. </li></ul></ul><ul><ul><li>Looking to add customers to their existing infrastructure. </li></ul></ul><ul><ul><li>Concerned with profitability of acquired customers on their infrastructure. </li></ul></ul><ul><li>Platform/Strategic buyers </li></ul><ul><ul><li>Looking for a base of operations, new product line, geographical expansion or otherwise choose not to consolidate. </li></ul></ul><ul><ul><li>Concerned with systems, processes, network, employees & profitability. </li></ul></ul>C HEVAL C APITAL, I NC.
  • 7. Valuation II <ul><li>Consolidating buyers concerned with their profitability not the seller’s. </li></ul><ul><li>Buyers look at a variety of things to determine profitability of seller’s revenues to them. </li></ul><ul><ul><li>Bandwidth usage </li></ul></ul><ul><ul><li>ARPU </li></ul></ul><ul><ul><li>Customer growth and churn rates </li></ul></ul><ul><ul><li>Support & infrastructure intensity </li></ul></ul><ul><li>Assets used to produce revenues/cash flow are not separately valued – they are part of the revenue valuation. </li></ul>C HEVAL C APITAL, I NC.
  • 8. Market Conditions - Multiples 2.5x – 7.0x 1.0x – 2.5x Multiple of Annual Revenue 2x – 4x 0.5x-1.2x digitalNation C HEVAL C APITAL, I NC.
  • 9. Terms - Price Versus Risk <ul><li>Price paid (and when) is a direct function of; </li></ul><ul><ul><li>How profitable the business is to the buyer; and </li></ul></ul><ul><ul><li>How much risk there is of realizing that profit. </li></ul></ul><ul><li>Two examples </li></ul><ul><ul><li>100% paid upfront in cash means more risk for the buyer and thus a lower price. </li></ul></ul><ul><ul><li>100% paid over time based on profits means more risk for the seller and thus a higher price. </li></ul></ul>C HEVAL C APITAL, I NC.
  • 10. Market Conditions – Future Multiples Hosting Transaction Multiples 1999 2007 <ul><ul><li>Lower industry growth rates </li></ul></ul><ul><ul><li>High churn </li></ul></ul><ul><ul><li>Pricing pressure </li></ul></ul><ul><ul><li>Noisy advertising environment </li></ul></ul><ul><ul><li>No big new buyers </li></ul></ul><ul><ul><li>Google, Yahoo, etc. </li></ul></ul><ul><ul><li>No barriers to entry </li></ul></ul>10x 1x C HEVAL C APITAL, I NC.
  • 11. Valuation III – Other Factors <ul><li>Control Panel </li></ul><ul><li>Billing Systems </li></ul><ul><li>Credit Card Information </li></ul><ul><li>OS (Linux)‏ </li></ul><ul><li>Responsive Seller </li></ul><ul><li>US Based </li></ul><ul><li>Clean Records </li></ul><ul><li>Type of Hosting </li></ul><ul><li>Deal Size (under $100,000 or larger)‏ </li></ul><ul><li>ARPU </li></ul><ul><li>Pure Play </li></ul>C HEVAL C APITAL, I NC.
  • 12. Market Conditions – Deal Volume <ul><li>Sharp increase in numbers of buyers. </li></ul><ul><ul><li>Buyers looking to offset difficulties in organic growth (churn, advertising noise, etc). </li></ul></ul><ul><ul><li>More companies have matured and have the systems and management to do an acquisition. </li></ul></ul><ul><ul><li>Most are small to medium sized hosters buying out of cash flow. </li></ul></ul><ul><li>Sharp increase in numbers of sellers. </li></ul><ul><ul><li>Customer base growth slows/stops/declines. </li></ul></ul><ul><ul><li>Management or investor fatigue. </li></ul></ul><ul><ul><li>Static multiples. </li></ul></ul><ul><ul><li>Out of space or power. </li></ul></ul>C HEVAL C APITAL, I NC.
  • 13. Summary <ul><li>Good News </li></ul><ul><ul><li>Transaction values stable. </li></ul></ul><ul><ul><li>More companies buying & selling. </li></ul></ul><ul><ul><li>Transactions fairly easy to accomplish for mainstream sellers at market multiples. </li></ul></ul><ul><ul><li>Deal volume increasing. </li></ul></ul><ul><li>Not so Good News </li></ul><ul><ul><li>Transaction values at risk if big players reduce industry profitability. </li></ul></ul><ul><ul><li>Unique companies difficult to sell. </li></ul></ul><ul><ul><li>Few well financed large buyers. </li></ul></ul>C HEVAL C APITAL, I NC.
  • 14. Endurance International - Overview <ul><li>Founded in 1997 </li></ul><ul><li>Backed by a $2 Billion private equity firm </li></ul><ul><li>A leading provider of Web Hosting services to small and medium sized businesses </li></ul><ul><li>Serving over 600,000 customers world wide </li></ul><ul><li>Completed over 28 acquisitions in the last four years </li></ul><ul><li>24 hour customer support via e-mail, phone and chat </li></ul><ul><li>Highly automated, Operational Support System (OSS) </li></ul><ul><li>State of the art clustered Unix and Windows platform </li></ul><ul><li>Can easily private - brand for its multiple properties and resellers </li></ul><ul><li>Multiple brand strategy to reach certain market segments </li></ul><ul><li>Proprietary, 350-step Migration Methodology </li></ul>Endurance International Group, Inc.
  • 15. Example Brands Endurance International Group, Inc.
  • 16. Endurance’s Acquisition Criteria <ul><li>Shared Hosting Companies/Assets with 5,000 – 400,000+ Subscribers; </li></ul><ul><li>Growing customer base; </li></ul><ul><li>Data consistency; </li></ul><ul><li>Sites hosted on Unix and Windows platforms; </li></ul><ul><li>Small business Subscribers; </li></ul><ul><li>Hosting packages priced from $6 to $50 per month; </li></ul><ul><li>Credit card billing preferred; </li></ul><ul><li>Technical resources available to aid in migration; </li></ul><ul><li>Subscriber-base/asset sale preferred. </li></ul>Endurance International Group, Inc.

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