SoftLayer – Right on Schedule – My Estimate $2.5 billion

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I just surprised myself and realized this is the third blog (No 1 and No 2)  that I have written about SoftLayer and my personal company valuation. As I have already put my head on the chopping block twice why not go for a third X. In case you missed it, the rumor is that SoftLayer are in talks with IBM regarding an acquisition in the $2 billion range. Which did not surprise me; I pegged it over a year ago.

My last valuation was based on a 3Q 2011 blurb where SoftLayer announced  $85 million in revenues and $34 million EBITDA (annualized –  $340/$136 m).  Since then it has been quiet about the numbers. So anything we look at today is almost six quarters old — an eternity.

I have pondered through a lot of information, general data center utilization, servers under management and added data center space. Guess what? I really got nowhere except dead ends, just not enough information to validate anything.

So I think, if there even is a transaction, it is in the $2.5 billion range.

How am I getting there? My best guess is that SoftLayer’s running revenues are in the $475 to $525 million range. EBITA still trending at 40 percent +, or $190 to $210 million.

The key lies in three variables: A – IBM trades at 9.74X EBITDA, (B) IBM has an EBITDA margin of 25.7 percent while SoftLayer has always been in the 40 percent range, a big difference in favor of SoftLayer,  and (C) the participants are not looking at trailing or running statistics, try  forward 12 month numbers in the deal-making.

So looking forward, the deal-makers could easily be looking at some $240m EBITDA, which at 10X equals $2.4 billion ($2.5 billion is just a rounder number).

If you look just look back a few weeks it was announced that Cogeco is picking up Peer1 in a 12.1X EBITDA and 3.1X revenue transaction. So we could be in that stratosphere.

Obviously IBM does not need to do the deal, but as I stated in a 2010 HostingCon presentation the company wanted to do $20 billion of acquisitions in 5 years. In 2012 IBM came out again stating it wanted to do $20 billion in the next 5 years. It is actually behind its goal as in three years they only closed $11 billion in acquisitions. By the way, the average transaction was $340 million.

Obviously there are a lot of “if’s” here but there is one certainty, Lance Crosby became the Mayor of GI Partners last Friday in Menlo Park, California, and that speaks volumes.

Later than sooner – Tom

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