hillary stiff - hostingcon july 2006, "mergers & acquisitions in the web hosting...
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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.TRANSCRIPT
Mergers & Acquisitions in the Web Hosting Industry
Joe BardenheierEndurance International
Group, Inc.
Hillary StiffCheval Capital, Inc.
Agenda• 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.
0
1
2
3
4
5
6
7
1999 2006
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 Multiples1999 2006
• Lower industry Lower industry growth rates growth rates • High churnHigh churn• Pricing Pricing pressurepressure• Noisy Noisy advertising advertising environmentenvironment• No big new No big new buyersbuyers• Google, Yahoo, Google, Yahoo, etc.etc.• No barriers to No barriers to entry entry
10x
1x
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
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.
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.
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.
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.
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
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.
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.
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
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.
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.
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
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.