We want to thank everyone for a terrific 2013 and wish you the best for a happy and prosperous 2014. Here at Cheval we completed over 30 hosting and related transactions in 2013 pushing our Internet services transaction total to over 250 transactions since we first got started in the space in the late 1990s.
As the year comes to a close, we thought it might be helpful to provide a summary of what we saw as the major trends in the Hosting & Infrastructure as a Service businesses for 2013 (excluding co-location.)
Money & Management
Often a useful way to understand what is going on in an industry is to follow where money and management is going. Over the last year we’ve seen new and existing players continue to put money to work establishing platforms, acquiring technologies and expanding customer bases in both North America and Europe. We’ve also seen both groups bringing in new, high-level management from outside the industry resulting in an increase in overall talent level and capabilities.
New money coming into the sector. Whether it was through IPOs (Endurance, Wix), or acquisitions by companies from outside the industry (Cogeco, Ingram Micro) or investments/purchases by Private Equity groups (Cinven, Littlejohn & Co), 2013 was marked by a significant amount of new money coming into the business.
- Strategic acquisitions by existing players. In addition to the new money coming into the sector to acquire companies, we also saw a number of strategic acquisitions by existing hosters to gain capabilities and technologies. These transactions ranged from the very large purchase of Softlayer by IBM to smaller purchases by GoDaddy, CenturyLink, NTT, and others.
- Consolidating acquisitions by existing players. While not at the same rate as in past years, we continued to see companies acquire customer bases for growth, to realize the benefits of economies of scale or both.
These positive trends appear fueled by expectations for strong growth from deployment of cloud computing infrastructures and services and continued outsourcing.
A related and positive trend in 2013 was an increase in both private and public market valuations for hosters. We saw higher valuations for the larger private transactions, including, among others, the purchases of; Softlayer (10-12x EBITDA), HostEurope (13.8x EBITDA), Peer1 (14.5x EBITDA) and iWeb (13.8x EBITDA). In the public markets, there were IPOs for Endurance (11.5x EBITDA) and Wix (8x revenues) at good valuations as well as an increase in relative valuation of Web.com. Rackspace & Internap’s relative valuations suffered somewhat during the year but these appear to be more company specific than overall market related. We did not see an increase in overall valuations for smaller company transactions, although the market for such companies remains healthy and some transactions were certainly done at a premium.
We attribute the increase in valuations to the expectations for the future growth of the industry and the new money coming into the industry that such growth has attracted.
While we certainly saw many companies posting rapid growth rates (Amazon Web Services, Digital Ocean, etc.), 2013 was striking to us in the unevenness of growth across the sector. The biggest example being Amazon Web Services who reportedly added approximately $2 billion of revenue versus everyone else. In comparison, Rackspace, perhaps the best hosting company in the business over the last 10 years, was projected to add approximately $150 million of revenue in 2013. While we’re not sure we agree with those that suggest that Amazon grew more in total dollars than everyone else combined, the fact that it is at all close is remarkable.
While difficult to be certain, it also appears that the newer cloud hosters saw better growth in cloud hosting than legacy hosters that have developed similar services. While certainly not true across the board, we did see it often enough to be concerned that the legacy hosters are not benefitting from the overall growth of the industry.
Growth in shared hosting continued to be difficult and it appears that meaningful growth rates were limited to companies using one of only a few business models. These more successful models include those relying on use of; (a) a domain registrar to capture customers when they first register their domain (e.g. Web.com, GoDaddy); (b) free website design tools (e.g. Wix, Weebly, etc.); (c) hosting for specialized products (e.g. Wordpress); or (d) Affiliate based customer acquisition. Companies trying to grow using more general strategies seemed to have less success.
We view this uneven growth with some concern as it shows that the rising tide of the industry’s growth and transformation is not lifting all boats.
Overall, we believe it was a strong year for the Hosting / Infrastructure as a Service business with the influx of capital and management together with higher valuations boding well for the future. The unevenness of growth across segments is concerning and probably related to the transitioning of the business from one set of technologies and services to another. Such transition creating opportunities for some and problems for others.
We hope this has been helpful and are happy to discuss any of these topics at your convenience.
Hillary Stiff & Frank Stiff
Cheval Capital, Inc.
+1 703 549 7390
Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.