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VALUATION OF PUBLIC HOSTING COMPANIES - NOVEMBER 26, 2018

Summarized below are estimates of the relative valuations of some public companies that have significant hosting operations. Please be aware that a number of these companies have other businesses that also affect their valuations. (All data was taken from publicly available financial information and please see this post for how we calculate Enterprise Value.) If you wish to get a sense for changes to valuations over time, here is a link to some of our past valuation summaries.

As has been the case for some time, companies with higher organic growth rates have higher valuation multiples.

2018-11-26 Fins.JPG

As always, please feel free to contact us if you have any comments, or questions.

Cheval Capital, Inc.

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.

Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including The Endurance International Group and Web.Com among many others. She has helped complete over 450 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

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Web.com to be acquired by Siris Capital Group - UPDATED

Congratulations to our friends at Web.com on their agreement to sell the business to Siris Capital Group, LLC. for $28/share. The price reflects an Enterprise Value of approximately $2 billion and appears to be 10-11x Adjusted EBITDA (L3MA.)

The final purchase price of $28/share was an increase from the $25/share initially announced prior to the go-shop period thirty days prior and reflects some last minute bidding by prospective suitors.

Web.com is one of the older US hosters having been a startup by Norwest Venture Capital in the late 1990's. The transaction is expected to close in the fourth quarter of 2018.  

As always, please feel free to contact us if you have any comments, or questions.

Cheval Capital, Inc.

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.

Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including NTT/Verio, The Endurance International Group and Web.Com among many others. She has helped complete over 450 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

Frank Stiff appointed Director and 2019 Board Chair-Elect of the i2Coalition

Washington D.C., August 2nd, 2018 -  The i2Coalition (Internet Infrastructure Coalition) announced that Frank Stiff, President, and Co-Founder of Cheval Capital, has been appointed to its Board of Directors, and named Chair Elect. Mr. Stiff’s position as Chair Elect became effective on immediately. He will assume his role as Board Chair on January 1st, 2019 and hold the office throughout the year. Until that time, Mr. Stiff will work with current Board Chair Michele Neylon. Mr. Stiff’s full term on the Board of Directors will last until 2021.

Frank is an investment banker with particular expertise in Cloud, hosting and related Internet services businesses. He has spent the last twenty years providing advice and helping many companies in these sectors complete transactions. A regular speaker at industry conferences, Frank was an early member of the i2Coalition and has been active on the Policy Working Group and lobbying fly-ins.

Christian Dawson, i2Coalition Co-Founder, and Executive Director said, "We are a member-led organization, that believes in the importance of small business Internet innovation. I’m extra proud that we are turning to one of our most active members to take on the role of Chair Elect. Frank runs a business designed to help small businesses and is a small business owner himself. His insights have been, and will be, invaluable" 

“Frank has been actively engaged in the internet industry for eons. He knows all the players and has been very active and vocal as an advocate for the industry for many years. I’m confident that he will be a strong and rational voice for our industry,” added i2Coalition Board Chair and Blacknight CEO Michele Neylon. 

Frank commented, “It has been a great pleasure to work with the i2Coalition over the past seven years and I look forward to helping the organization continue its valuable work on behalf of the many companies that build and run the nuts and bolts of the Internet.”

#  #  #

About i2Coalition

The i2Coalition (Internet Infrastructure Coalition) ensures that those who build the infrastructure of the Internet have a voice in global public policy. Founded in 2012, the i2Coalition is the leading voice for web hosting companies, data centers, registrars and registries, cloud infrastructure providers, managed services providers, and related tech. The i2Coalition protects the innovation and continued growth of the Internet’s infrastructure, essential to the global economy.

Contact
For more information, please contact:

Dakota Graves,
Communications Manager, i2Coalition
718 7th Street NW, 2nd Floor,
Washington DC 20001
Office: (202) 621 0773
dakota@i2Coalition.com

VALUATION OF PUBLIC HOSTING COMPANIES - MARCH 9, 2018

Summarized below are estimates of the relative valuations of some public companies that have significant hosting operations. Please be aware that a number of these companies have other businesses that also affect their valuations. (All data was taken from publicly available financial information and please see this post for how we calculate Enterprise Value.)  If you wish to get a sense for changes to valuations over time, here is a link to some of our past valuation summaries. (We'll add United Internet when it releases Q4 2017 financial information on March 22.)

2018-03-09 Public Company Comps Pic.png

As always, please feel free to contact us if you have any comments, or questions.

Cheval Capital, Inc.

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.

Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including The Endurance International Group and Web.Com among many others. She has helped complete over 450 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

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Cheval Year End Letter - 2017

We’d like to thank our clients and colleagues for a great 2017.  Overall M&A activity in cloud, hosting and related business segments was again at high levels and we were fortunate to complete 58 transactions during the year.  Our M&A transactions included a broad mix of sizes of cloud, hosting and related businesses and we have now completed over 430 internet related transactions since we first got started in the Internet services space in the mid-1990s. 

As the New Year starts, we’d like to take a moment to highlight some of our observations on the hosting, cloud and related business markets. 

SMB hosting/cloud business is a market of siloed mass-market-products: While this is not new, it is fascinating to us that such a large percentage of the SMB providers in the hosting/cloud space are companies offering a limited set of products/services on a mass-market, often commoditized basis. This focus on a limited product/service set is great for several reasons but it can also can create problems, particularly when market growth slows either due to maturation or competition from substitutes.

What happens when growth slows? As market growth has slowed in several business segments, the limited product/service set providers in those segments have seen their growth slow along with it. Providers that had been growing more slowly than the market to begin with have had difficulty even replacing normal attrition and some have begun to shrink.

Options: Service providers in these slow growth segments appear to be pursuing one or more of several paths (generally in order of declining difficulty);

  • Using sales and marketing to take customers away from other providers
  • Expanding into new products/services that are either related or have related customer bases
  • Abandoning customer growth as a goal and running the business to maximize the cash flow from these customers (either for distribution to owners or for expansion into unrelated businesses)
  • Using M&A to acquire customers or exit the business.

It appears larger providers pursue several of these options simultaneously. The small to mid-sized providers generally tend to focus on one or two.

Our view: While there will be a few providers that can take customers away from others and continue growth in these mature segments, we don’t think it will be possible for most providers unless they offer new, higher growth products or services. As such, we expect to see providers in these segments either (a) diversify into a broader suite of products/services with related customer bases, or (b) use M&A to acquire customers or exit.  

We hope this is helpful and we look forward to working with you in 2018.

Hillary Stiff & Frank Stiff
Cheval M&A, Inc.
Cheval Capital, Inc.

Disappearing Revenue (or Another reason to hate Deferred Revenue)

This is a bit of an inside baseball kind of post on M&A accounting.

The issue we wanted to bring up is about revenue disappearing in an acquisition just because of accounting rules. The reason? GAAP (the standards for US accounting) require a buyer to adjust Deferred Revenue to its "fair value". That "fair value" is typically the cost of providing the service that underlies the Deferred Revenue.

Just to review;

  • Deferred Revenue is a balance sheet liability created when someone pays in advance for a service. If a customer pays you $240 for 12 months of service, 1st month revenue is $20 and Deferred Revenue goes up by $220. 
  • The next month the company receives no additional cash but books revenue of $20 and Deferred Revenue declines by $20.
  • This occurs every month until month 12, when the company books $20 of revenue and Deferred Revenue goes to $0.

So if the cost of providing the underlying service is 70% of the revenue, then on closing the value of Deferred Revenue goes down by 30% and all the revenue & income associated with it disappear for Income Statement purposes. The customers are still there and when they renew that revenue comes back at 100%.

How big an issue is this? Web.Com lost $8.6 million of quarterly revenue & earnings in Q1 '16, another $6 million in Q2 '16 and $1-2 million in every quarter since because of this. The percentage of annual payers and operating margin being the key drivers.

This kind of revenue loss can have a big impact on loan ratios, earn-out payments, budgets, etc. and is best identified and dealt with prior to closing.

For a more on this topic please feel free to give us a call or check out this Journal of Accounting article.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any stocks mentioned above, a comprehensive discussion of valuation or how to do any calculations. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.

 

 

Cloud Market Share

A great chart in today's WHIR breaking down the market shares of the largest cloud providers and how they changed in Q2 2017.  Here is the link. From this data it looks like Amazon, Microsoft and Google continue to take market share away from everyone else except IBM.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any stocks mentioned above, a comprehensive discussion of valuation or how to do any calculations. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.

Cheval Capital Celebrates Our 400th Transaction!

We're excited to announce that Cheval Capital recently celebrated our 400th transaction! Since we first entered the space in the late 1990's Hillary & Frank have helped businesses in cloud, hosting, and IAAS industries navigate the tricky waters of mergers and acquisitions, financings and corporate finance.

The 400-transaction benchmark also marks the 25th transaction we've successfully closed so far in 2017! Over the last few months we've completed transactions with companies in Ireland, Australia, New Zealand, China, Israel, Canada as well as the US.

Our extensive industry expertise & network have enabled us to help our clients get maximum value from the unique aspects of their business regardless of location.

Here's what Hillary Stiff had to say about passing the 400 mark, “Over the last few years our business has grown as providers have struggled with organic growth and have turned to acquisitions instead. This acquisition demand has supported prices and led to an active transaction market."

Click on the links above to get more information about Cheval or feel free to contact us with any questions you have. We're always happy to help.
 

How To Buy An Online Business With An SBA Loan – The Process

How To Buy An Online Business With An SBA Loan – The Process

We'd like to thank Mark Daoust, owner of Quiet Light Brokerage, for giving us permission to reprint his blog post on SBA loans, part 2 of which is below. Mark is the go-to-guy for the purchase or sale of online eCommerce businesses and if you have an interest in that space, we encourage you to contact him at inquiries@quietlightbrokerage.com.

The US Government's Small Business Administration lends up to $5 million that businesses that meet certain criteria. The post below talks about the general requirements of an SBA loan while part 2 will get into the process of applying for an SBA loan.

How To Buy An Online Business With An SBA Loan - The Requirements

How To Buy An Online Business With An SBA Loan - The Requirements

We'd like to thank Mark Daoust, owner of Quiet Light Brokerage, for giving us permission to reprint his blog post on SBA loans, part 1 of which is below.  Mark is the go-to-guy for the purchase or sale of online eCommerce businesses and if you have an interest in that space, we encourage you to contact him at inquiries@quietlightbrokerage.com.

The US Government's Small Business Administration lends up to $5 million that businesses that meet certain criteria. The post below talks about the general requriements of an SBA loan while part 2 will get into the process of applying for an SBA loan.

 

Hillary Stiff's HostingCon 2017 Valuation Slides

Below is a link to Hillary Stiff's slides from HostingCon 2017 on current valuations in the hosting and cloud markets. Please feel free to send over any questions.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any 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 or purchase of a business or making other financial decisions.

VALUATION OF PUBLIC HOSTING COMPANIES - March 22, 2017

Summarized below are estimates of the relative valuations of some public companies that have significant hosting operations. Please be aware that a number of these companies have other businesses that also affect their valuations. (All data was taken from publicly available financial information and please see this post for how we calculate Enterprise Value.)  If you wish to get a sense for changes to valuations over time, here is a link to some of our past valuation summaries.

As always, please feel free to contact us if you have any comments, or questions.

Cheval Capital, Inc.

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.

Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including The Endurance International Group and Web.Com among many others. She has helped complete over 370 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

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Conferences!

Here is our conference schedule for the next few months.

  • World Hosting Days – March 27-30, 2017. Rust, Germany
  • HostingCon – April 3-6, 2017. Los Angeles, California
    • Hosting Feud with Drinks Game Show on April 3rd at 5pm.
    • Hillary Stiff is speaking on the current climate and trends in M&A on April 5th.
  • Pressnomics – April 7, 2017. Tempe, Arizona

Please let us know if you will be attending any of these as we'd enjoy meeting up!

Better Deals Can Be Made With Kindness & Professionalism

Better Deals Can Be Made With Kindness & Professionalism

We'd like to thank Mark Daoust, owner of Quiet Light Brokerage, for giving us permission to reprint the blog post below.  Mark is the go-to-guy for the purchase or sale of online eCommerce businesses and if you have an interest in that space, we encourage you to contact him at inquiries@quietlightbrokerage.com.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any 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.

Better Deals Can Be Made With Kindness & Professionalism

In Hollywood movies, the big-shot businessman is always sitting in their high-rise office negotiating big-dollar deals and barking down the phone. It is easy to look at that and think this is the way it should be done in real life.

Cheval Year End Letter - 2016

Happy New Year

We want to thank our clients and colleagues for a record breaking 2016.  M&A activity in cloud, hosting and related business segments was at high levels during 2016 and we were fortunate to complete 24 M&A and 35 IPv4 block transactions.  The M&A transactions included a broad mix of sizes and types of hosting businesses and we have now completed over 370 internet services and related transactions since we first got started in the space in the mid-1990s.  

As we have done for the last few years at this time, we’d like to take a moment to highlight a few of the industry trends that caught our eye during 2016:

Industry growth in dollar terms continues to accelerate - *: The Hosting and Cloud business had another solid year in 2016. While the industry’s growth rate declined to an estimated 18.8% rate in 2016 from 20.2% in 2015, the industry’s growth in total dollars accelerated from an estimated $12.1B increase in 2015 to an estimated $13.5B increase in 2016. We believe the continued increases in dollar growth to be a more significant predictor of industry health than percentage growth at this time, particularly in the current stable/declining price environment. These increases highlight the continued expansion of demand for cloud, hosting and related services. 451 Group’s projections indicate growth in dollar terms is likely to continue to accelerate over the next few years.

As in previous years, growth across the industry continues to be uneven. This year we’ve worked with hosters growing at 30+% per year and hosters that are shrinking. We expect this unevenness to continue.

(* - 451 Research, Market Monitor 2016.)

Divergence of brains & brawn: We’ve seen increasing numbers of service providers offering service on others’ infrastructure. While not uncommon in the past, we’re now seeing it on a larger scale and among providers of higher end and more specialized services. Our expectation is that as the hyper-scalers continue to reduce prices and expand service, we will see more of these infrastructure-lite providers. We believe this separation is due in part to a declining rate of return on commodity infrastructure and in part from new opportunities the hyperscalers are creating (e.g. support, onboarding, management.)

We also believe that for the smaller providers, selling brains is likely to generate a higher risk adjusted return than commodity computing infrastructure. A key problem however, is that valuation and sale of businesses that sell hours of service like a consulting firm can be more difficult. Companies following this path need to ensure they automate and productize their service.

AWS Lightsail: Amazon Web Services (“AWS”) released a new VPS hosting product in late 2016. While the Lightsail product is not revolutionary or particularly aggressively priced, it does signal AWS’s desire to go after the unmanaged VPS market more seriously. If AWS remains true to form, we can expect price cuts, better hardware and an expanded product/service portfolio down the road. Given their size advantages, they are likely to be a formidable competitor to existing SMB hosters.

Ongoing M&A Trends: Lastly, a number of the M&A trends we highlighted last year appear to be continuing. Rather than repeat ourselves, you may find our 2015 letter https://www.chevalcap.com/blog/2016/1/11/hosting-ma-update of interest.

 

Best wishes for a happy and healthy 2017!

Hillary Stiff & Frank Stiff
Cheval Capital, Inc.