Mergers & Acquisitions in the Web Hosting Industry

Joe BardenheierEndurance International

Group, Inc.

Hillary StiffCHEVAL CAPITAL, INC.

Agenda

• Cheval Capital, Inc.• Valuation Methodology• Multiples - Historical, Current and Projected• Terms - Price Versus Risk• Factors in Valuation• Deal Volume • Summary

CHEVAL CAPITAL, INC.

CHEVAL CAPITAL, INC.

• 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.

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

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

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

Market Conditions - Multiples

0

1

2

3

4

5

6

7

1999 2007

2.5x – 7.0x

1.0x – 2.5x

Multiple of Annual Revenue

2x – 4x

0.5x-1.2x

digitalNation

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

Market Conditions – Future Multiples

Hosting Transaction Multiples1999 2007

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

CHEVAL CAPITAL, INC.

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

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

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.

CHEVAL CAPITAL, INC.

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.

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.