"How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

13
Hillary Stiff Cheval Capital, Inc. April 27, 2007 How Much is Your Company Worth?

description

These are the slides for a presentation Hillary Stiff gave at SWSoft's 2007 Summit on how web hosting companies are valued.

Transcript of "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

Page 1: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

Hillary StiffCheval Capital, Inc.April 27, 2007

How Much is Your Company Worth?

Page 2: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.2

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

Page 3: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.3

Cheval Capital, Inc.• Who we are.

Boutique investment bank active in hosting/ISPs since 1996. Completed over 85 Hosting/ISP acquisitions, 20 in 2006 and 6 in the first

few months of 2007.

• Who we work for. Endurance International Group, Verio, Rackspace, Nextel, etc. Clearinghouse for small and mid sized companies.

• What we do. Use our contacts, market knowledge & experience to get the best terms

and increase the likelihood for success. Distribute a weekly deal listing with over 30 sellers, creating a deal

marketplace.

Page 4: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.4

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.

Page 5: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.5

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

Page 6: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.6

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.

Page 7: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.7

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.

Page 8: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.8

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

Page 9: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.9

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.

Page 10: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.10

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

Page 11: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.11

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

Page 12: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.12

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.

Page 13: "How Much is Your Hosting Company Worth?" Hillary Stiff, Cheval Capital Inc, SWsoft Summit 2007

How Much Is Your Company Worth – Cheval Capital, Inc.13

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.