Mergers & Acquisitions in the Web Hosting Industry Joe Bardenheier Endurance International Group, Inc. Hillary Stiff C HEVAL C APITAL , I NC .

Agenda Cheval Capital, Inc. Valuation Methodology Multiples - Historical, Current and Projected Terms - Price Versus Risk Factors in Valuation Deal Volume Summary C HEVAL C APITAL, I NC.

Cheval Capital, Inc.

Valuation Methodology

Multiples - Historical, Current and Projected

Terms - Price Versus Risk

Factors in Valuation

Deal Volume

Summary

C HEVAL C APITAL , I NC . Who we are Investment bankers active in hosting/ISPs since 1996. Completed over 92 Hosting/ISP acquisitions, 20 in 2006 and 11 YTD in 2007 including Endurance/iPowerWeb. Who we have worked for Endurance Int’l Group, Verio, Rackspace, Nextel, etc. What we do Represent buyers & sellers of hosting, telecom and related companies. Distribute a weekly deal listing with over 30 sellers, creating a deal marketplace for small and mid sized companies. C HEVAL C APITAL, I NC.

Who we are

Investment bankers active in hosting/ISPs since 1996.

Completed over 92 Hosting/ISP acquisitions, 20 in 2006 and 11 YTD in 2007 including Endurance/iPowerWeb.

Who we have worked for

Endurance Int’l Group, Verio, Rackspace, Nextel, etc.

What we do

Represent buyers & sellers of hosting, telecom and related companies.

Distribute a weekly deal listing with over 30 sellers, creating a deal marketplace for small and mid sized companies.

Valuation I Generally quoted as a multiple of recurring revenues. Multiples can be calculated based on historic recurring revenues; trailing twelve months or trailing six/three months annualized. Multiples typically calculated on current annualized recurring revenue basis. Non-recurring revenues are typically not included or if included will be calculated at a lower multiple with payments made post close. Some acquirors, notably platform, focus more on EBITDA/Cash Flow of seller. C HEVAL C APITAL, I NC.

Generally quoted as a multiple of recurring revenues.

Multiples can be calculated based on historic recurring revenues; trailing twelve months or trailing six/three months annualized.

Multiples typically calculated on current annualized recurring revenue basis.

Non-recurring revenues are typically not included or if included will be calculated at a lower multiple with payments made post close.

Some acquirors, notably platform, focus more on EBITDA/Cash Flow of seller.

Annualized Recurring Revenue Annualized Recurring Revenue is the most commonly used revenue base for valuation purposes. Illustration of how to calculate Annualized Recurring Revenue. 10,000 customers @ $10/mo x 12 pmts = $1,200,000 15,000 customers @ $15/mo x 12 pmts = $2,700,000 25,000 customers @ $25/qtr x 4 pmts = $2,500,000 3,000 customers @ $100/yr x 1 pmt = $ 300,000 Total Annualized Revenues = $6,700,000 C HEVAL C APITAL, I NC.

Annualized Recurring Revenue is the most commonly used revenue base for valuation purposes.

Illustration of how to calculate Annualized Recurring Revenue.

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

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

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

3,000 customers @ $100/yr x 1 pmt = $ 300,000

Total Annualized Revenues = $6,700,000

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, new product line, geographical expansion or otherwise choose not to consolidate. Concerned with systems, processes, network, employees & profitability. C HEVAL C APITAL, I NC.

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, new product line, geographical expansion or otherwise choose not to consolidate.

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

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/cash flow are not separately valued – they are part of the revenue valuation. C HEVAL C APITAL, I NC.

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/cash flow are not separately valued – they are part of the revenue valuation.

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.

Terms - Price Versus 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. C HEVAL C APITAL, I NC.

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.

Market Conditions – Future Multiples Hosting Transaction Multiples 1999 2007 Lower industry growth rates High churn Pricing pressure Noisy advertising environment No big new buyers Google, Yahoo, etc. No barriers to entry 10x 1x C HEVAL C APITAL, I NC.

Lower industry growth rates

High churn

Pricing pressure

Noisy advertising environment

No big new buyers

Google, Yahoo, etc.

No barriers to entry

Valuation III – Other Factors Control Panel Billing Systems Credit Card Information OS (Linux)‏ Responsive Seller US Based Clean Records Type of Hosting Deal Size (under $100,000 or larger)‏ ARPU Pure Play C HEVAL C APITAL, I NC.

Control Panel

Billing Systems

Credit Card Information

OS (Linux)‏

Responsive Seller

US Based

Clean Records

Type of Hosting

Deal Size (under $100,000 or larger)‏

ARPU

Pure Play

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. Management or investor fatigue. Static multiples. Out of space or power. C HEVAL C APITAL, I NC.

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.

Management or investor fatigue.

Static multiples.

Out of space or power.

Summary Good News Transaction values stable. More companies buying & selling. Transactions fairly easy to accomplish for mainstream sellers at market multiples. Deal volume increasing. Not so Good News Transaction values at risk if big players reduce industry profitability. Unique companies difficult to sell. Few well financed large buyers. C HEVAL C APITAL, I NC.

Good News

Transaction values stable.

More companies buying & selling.

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

Deal volume increasing.

Not so Good News

Transaction values at risk if big players reduce industry profitability.

Unique companies difficult to sell.

Few well financed large buyers.

Endurance International - Overview Founded in 1997 Backed by a $2 Billion private equity firm A leading provider of Web Hosting services to small and medium sized businesses Serving over 600,000 customers world wide Completed over 28 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 Endurance International Group, Inc.

Founded in 1997

Backed by a $2 Billion private equity firm

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

Serving over 600,000 customers world wide

Completed over 28 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 International Group, Inc.

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. Endurance International Group, Inc.

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.