i2Coalition Panel: Privacy & Privacy Shield

The i2Coalition recently hosted a panel on Capitol Hill regarding the critical and impending issues of Privacy legislation in the US and the EU-US Privacy Shield. This was the third of three panels i2Coalition co-hosted with the European eco Association and included senior staffers from Congress, key i2Coalition members, Board Chair of the eco Association, and moderated by our own Frank Stiff, President of Cheval Capital and Board Chair of the i2Coalition. Watch the full video and learn more on the i2Coalition's website.

Key takeaway: Congress is moving toward enacting Privacy legislation that would have far reaching implications for US business, international trade and existing privacy laws such as California’s new privacy law (CCPA) and GDPR. See panel video 29:30 – 36:00 for an overview of what is driving the legislation and where things stand today.

Key takeaway: The EU-US Privacy Shield is a consensual, long-term data protection regime and is a requirement for any business model in which personal data is stored and processed across borders. Without Privacy Shield, it would be illegal to transfer personal data from the EU to the US, crippling Internet services trade between EU and the US. See 10:00 for an overview of Key Privacy Shield Issues Today.

Key takeaway: See 20:00 for two views on why privacy laws are different between the US & EU.

Key takeaway: See 44:30 for the lessons learned from GDPR after a year.

Cheval Capital

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.

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.)

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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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.

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.

United Internet Acquires Strato from Deutsche Telekom

Continuing the trend of telecom companies divesting hosting and co-location assets, Deutsche Telekom announced last week that it would sell its Strato hosting arm to United Internet for E600mm, approximately 12.4x 2016 EBITDA. For those keeping score, Deutsche Telekom acquired Strato in 2009 for E275MM giving it a compound annual return of about 11.8% (ignoring  intervening cash flows.)

Two other key points; approximately E34mm of the purchase price is subject to the business hitting certain performance targets which may take a little of the price risk out of the deal. Second, United Internet is reporting an expected E20mm p.a. of synergies from integrating the two businesses. Those additional synergies bring the incremental EBITDA margin for United to approximately 54%.

Overall pricing is in the same ballpark as GoDaddy's recent purchase of Host Europe Group.

United Internet's presentation on the purchase can be found here.

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 350 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

GoDaddy Acquires Host Europe Group

Congratulations to the folks at GoDaddy and Host Europe on their announced transaction.

The purchase price of $1.82 billion (including debt assumption) works out to approximately 13x 2016 EBITDA.  This compares to GoDaddy's estimated public market value of 15-20x EBITDA before the announcement.

Both companies have great management teams and this seems to be a transaction where there is an excellent chance that 2 + 2 > 4.

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 350 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

Expanding your business through M&A

We recently gave a presentation on M&A at a customer conference for a large Hosting Industry vendor. The slides turned out to be pretty complete so we're reposting!

Please feel free to contact us if you have any questions or comments.

Cheval Capital

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.

Expanding you business through M&A - Hosting Industry from Cheval Capital, Inc

VALUATION OF PUBLIC HOSTING COMPANIES - JULY 15, 2016

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 NTT/Verio, The Endurance International Group and Web.Com among many others. She has helped complete over 320 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 Capital Advises Melbourne IT Group on the sale of their International Domain Name Business to Tucows

Congratulations to the folks at Melbourne IT on the sale of their international domain business to Tucows.  Cheval advised Melbourne IT in the sale. 

Melbourne IT Group is a publicly listed company based in Australia. Their Small and Medium Business Division is Australia’s largest domains and hosting business, providing service to SMB’s under the Melbourne IT, WebCentral, Netregistry, and TPP brands.  Melbourne IT’s Enterprise Services Business Division is Australia’s leading software and cloud enabled and services business, operating under the Melbourne IT, Outware Systems and InfoReady brands. 

Frank Stiff, President of Cheval Capital commented on the event, “We were pleased to have been able to assist Melbourne IT with this transaction. Melbourne IT’s international domain name business, with its 250 global resellers across the USA, Europe and Asia, is a unique asset and was an excellent opportunity for Tucows to acquire a loyal, profitable base of resellers that has the same core needs as their existing wholesale customers.”

Year End Hosting M&A Update

We want to thank all of our clients and colleagues for a great 2015.  We were fortunate to complete a record 40 transactions in 2015.  These transactions included a broad mix of sizes & types of businesses and a number resulted from the vibrant IPv4 transaction market (now that the registries have exhausted their IPv4 supply.) We are now up to 316 hosting and related Internet services transactions since we first got started in the space in the mid 1990's.  Our M&A experience in 2015 does not appear to have been unique.  M&A activity in the hosting and co-location segments was at high levels during 2015 with the number of transactions and transaction values exceeding 2014 levels (including co-location.)  

During the year a number of trends caught our attention that we thought might be of interest.

Vibrancy of the Industry

The Hosting Industry had another great year in 2015. Despite its very large size (~$70+bn), the industry grew at an estimated 20% rate from 2014 to 2015.  The highest percentage growth rate was in the Platform as a Service sector (~29%), with the largest dollar growth rate in the industry's largest sector, Managed Hosting. This segment posted an estimated growth of $5.6bn or a 47% share of new industry revenues added. Growth however, was not evenly shared across companies and it is does appear clear that overall growth is decelerating. 

The drivers of growth continue to be well understood. These include;

• Increasing complexity is driving companies to outsource existing services and expand their need for new services;

• The economies of scale that service providers can achieve make their offerings attractive in value terms; an

• Companies like the convenience of a single vendor.

 Major Industry Trends Remain Intact

Last year we highlighted some trends that had recently emerged and represented a departure from past experience. These trends continued into 2015. Notably;

(1) The large, non-Amazon, cloud providers continued to gain workloads and revenue at high rates. The business models for these newer providers have gained traction and while it appears that Amazon will continue to dominate the space for the foreseeable future, these newer providers are increasingly competitive. Our expectation is that the continued growth of Amazon, Microsoft, IBM and Google will have an increasing impact on the economics of hosters in all segments.

(2) The rationale for M&A transactions has expanded sharply from consolidations to a much broader mix including products/markets/capabilities; and

(3) Historically commodity oriented providers have been adding features and services to create differentiation and move out of the commodity area.

All these trends continued, if not strengthened in 2015, and we see no reason why they won't continue for some time.  There were also several additional factors that caught our attention during the year;

(4) The mid-sized providers, those larger than $10-$15MM of EBITDA, have been getting bought out over the last few years and we are headed for a bar-belled like space with mostly large and small providers but few mid-sized ones.  While we don't expect all of the providers in this range to get bought out, and some new companies will grow into the range, we do expect this trend to continue. For companies in this range, that means a very attractive supply/demand environment when the decision is made to exit.

(5) We have been seeing more highly specialized companies emerging.  These companies seem focused on providing a single, highly specialized service.  The recently emerged Dispel.io and their Security as a Service being just one example.  The expanded M&A rationales (#2 above) appear to be feeding supply/demand for these types of companies. 

We hope this has been of interest and if you have any questions please contact us.

Best wishes for a healthy and productive 2016

Hillary Stiff & Frank Stiff

Cheval Capital, Inc.

January 11, 2016

SingleHop's 6th Year on the Inc 5000

Congratulations to our friends at SingleHop for their 6th consecutive year on the Inc 5000. 

Hillary Stiff Speaking At HostingCon Global

Hillary Stiff will be speaking at HostingCon Global in San Diego on July 27.  Her panel will look at the changes in Hosting M&A in 2014 and 2015 and the trends that have been building to cause these changes.  Panelists include Ditlev Bredahl of OnApp, Liam Eagle of 451 Group, & Ted Chang of GoDaddy.

Please let us know if you will be attending as we'd be happy to get together.    

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 280 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.

GoDaddy IPO - Pricing & Valuation

Congratulations to the folks at GoDaddy who priced their IPO last night above the range at $20/share.  It should begin trading sometime later this morning. 

Assuming no exercise of the underwriter's overallotment option and taking into account the 26mm+ issued but unexercised employee stock options , $20/share works out to a traditional Enterprise Value of approximately 19x EBITDA (LQA), ~ $4.3bn.  (Please see this post for how we calculate Enterprise Value). 

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 NTT/Verio, The Endurance International Group and Web.Com among many others. She has helped complete over 270 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.