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Hillary Stiff - HostingCon July 2006, "Mergers & Acquisitions in the Web Hosting Industry."


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Hillary Stiff of Cheval Capital (slides 1-16) & Joe Bardenheier of the Endurance International Group (slides 17-19) speak at HostingCon 2006 on M&A in the Web Hosting Industry.

Published in: Economy & Finance, Business

Hillary Stiff - HostingCon July 2006, "Mergers & Acquisitions in the Web Hosting Industry."

  1. 1. Mergers & Acquisitions in the Web Hosting Industry Joe Bardenheier Endurance International Group, Inc. Hillary Stiff Cheval Capital, Inc.
  2. 2. Agenda <ul><li>Shameless self promotion of Cheval </li></ul><ul><li>Market conditions </li></ul><ul><li>Price vs. profits & risk </li></ul><ul><li>Deal structure highlights </li></ul><ul><li>Valuation </li></ul><ul><li>Summary </li></ul>
  3. 3. Cheval Capital, Inc. <ul><li>Who we are. </li></ul><ul><ul><li>Boutique investment bank that began working in the industry with Verio in 1996. </li></ul></ul><ul><ul><li>Completed 80 Hosting and ISP acquisitions, 18 in 2006. </li></ul></ul><ul><li>Who we work for. </li></ul><ul><ul><li>Endurance International Group, Verio, Rackspace, Nextel, etc. </li></ul></ul><ul><ul><li>Clearinghouse for smaller companies. </li></ul></ul><ul><li>What we do. </li></ul><ul><ul><li>Use our contacts, market knowledge & experience to get the best terms and increase the likelihood for success. </li></ul></ul>
  4. 4. Market Conditions - Multiples 2.5x – 7.0x 1.0x – 2.5x Multiple of Annual Revenue 2x – 4x 0.5x-1.2x x DN
  5. 5. Market Conditions – Future Multiples Hosting Transaction Multiples 1999 2006 <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
  6. 6. 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>Burnout </li></ul></ul><ul><ul><li>Static multiples </li></ul></ul>
  7. 7. 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 for a new product line or company. </li></ul></ul><ul><ul><li>Concerned with systems, processes, network, employees & profitability. </li></ul></ul>
  8. 8. Price vs. Profits & 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>
  9. 9. Asset vs. Stock Deals <ul><li>Asset deals </li></ul><ul><ul><li>Buyer purchases specific assets from seller. Seller retains everything else including employees, debt, etc. </li></ul></ul><ul><ul><li>Typically includes customers, url and, if it’s a dedicated or VPS deal, servers </li></ul></ul><ul><ul><li>Preferred by consolidators. </li></ul></ul><ul><li>Stock or equity deals </li></ul><ul><ul><li>Buyer acquires all of the equity interests in the seller and takes over the entire company. </li></ul></ul><ul><ul><li>More common with platform/strategic buyers who want all of the operations and people. </li></ul></ul><ul><ul><li>Often more complex and risky than an asset deal. </li></ul></ul>
  10. 10. How do buyers pay? <ul><li>Equity interests of the acquiror </li></ul><ul><ul><li>Shares, LLC interests, etc. </li></ul></ul><ul><li>Assumption of liabilities </li></ul><ul><ul><li>Debt, leases (equipment, office and data center), etc. </li></ul></ul><ul><li>Cash </li></ul><ul><ul><li>Performance based earnouts, escrow, holdbacks, seller financing, etc. </li></ul></ul>
  11. 11. When do buyers pay? <ul><li>Many possible options; </li></ul><ul><ul><li>Signing of the APA </li></ul></ul><ul><ul><li>Migration of customers </li></ul></ul><ul><ul><li>Holdback expiration </li></ul></ul><ul><ul><li>Specific dates following closing </li></ul></ul><ul><li>Holdback issues </li></ul><ul><ul><li>Migration </li></ul></ul><ul><ul><li>Breaches of “Reps and Warranties” & fraud </li></ul></ul><ul><ul><li>Customer attrition (churn & inactive) </li></ul></ul><ul><ul><li>Seller obligations for transition / migration </li></ul></ul><ul><ul><li>Chargebacks & expenses </li></ul></ul>
  12. 12. Valuation I <ul><li>Multiples based on purchase price divided by historic revenues or revenues based on the seller’s current customer base. </li></ul><ul><li>Calculating revenues based on the seller’s current recurring revenue base. </li></ul><ul><ul><li>10,000 customers @ $10/mo x 12 = $1,200,000 </li></ul></ul><ul><ul><li>15,000 customers @ $15/mo x 12 = $2,700,000 </li></ul></ul><ul><ul><li>25,000 customers @ $25/qtr x 4 = $2,500,000 </li></ul></ul><ul><ul><li>Total Annualized Revenues = $6,400,000. </li></ul></ul><ul><li>Non-recurring revenues often don’t count. </li></ul>
  13. 13. 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 are not separately valued – they are part of the revenue valuation. </li></ul>
  14. 14. Valuation III – Other Factors <ul><li>Control panel </li></ul><ul><li>Billing cycles & Deferred Revenue </li></ul><ul><li>Credit cards & information </li></ul><ul><li>OS </li></ul><ul><li>Equipment </li></ul><ul><li>Data center lease </li></ul><ul><li>Employees </li></ul><ul><li>Type of hosting </li></ul><ul><li>Products </li></ul><ul><li>ARPU </li></ul><ul><li>DNS </li></ul><ul><li>Records </li></ul>
  15. 15. Valuation IV - Financials <ul><li>Required level of financial detail increases with transaction size. </li></ul><ul><li>Base requirement includes ability to track revenues, customers & servers. </li></ul><ul><li>Inadequate financial reporting eliminates buyers and hurts valuations. </li></ul>
  16. 16. 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><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 still more difficult to sell. </li></ul></ul><ul><ul><li>Few large buyers. </li></ul></ul>
  17. 17. Endurance International - Overview <ul><li>Founded in 1997 </li></ul><ul><li>Backed by a $1 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 230,000 customers world wide </li></ul><ul><li>Completed over 27 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>
  18. 18. Example Brands
  19. 19. 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>