October 15, 2006 | Posted By : Paul Stapleton at 1:10 AM PERMALINK | Blog Comments (0)

Mamut Acquires the Remainder of MMH Active24

In the next few posts we go overseas for M&A activity in the Mass Market Hosting sector. Our first stop is Norway.

In August 2006 Mamut ASA acquired the remaining shares of mass market hoster Active24 ASA is did not already own.

Mamut acquired Active24 for NOK 6.50 per share. (That's Norwegian Kroner for those of you who want to know. It trades at about 1 NOK for $0.15 USD)

Mamut is a Norweigen based software company offering a variety of business applications from accounting to CRM. It's about the same size as Active24.

For the quarter ending March 31, 2006 (1Q06) Active24 had revenue of 54.2 MNOK and EBITDA of 5.3 MNOK (That M in front of the NOK means millions.) So if we annualize the 1Q06 we get 216.8 MNOK in Revenue and an EBITDA of 21.2 MNOK.

Active24 had about 39.2 million shares and in-the-money options outstanding. Multiply those shares by 6.50 and we get a market cap of 254.7 MNOK. Mamut also acquired Active24's assets and liabilities which included current assets of 104.9 MNOK and liabilities of 161.2 MNOK. After adding the assets and subtracting the liabilities from Active24's market cap we get to an enterprise value of 198.4 MNOK.

If we divide that into the annualized revenue and EBITDA we see that Mamut acquired the remainder of Active24 at a Price-to-Revenue multiple of 0.90x and a Price-to-EBITDA multiple of 9.4x.

That's a little high for an EBITDA multiple and little low for a Price-to-Revenue multiple. A closer looks shows us that Active24's EBITDA margin was only about 10%, which is a little low for a MMH. In fact the same period the year prior Active24 had similar revenue but 7.3 MNOK in EBITDA. At that margin Mamut would have paid 6.6x EBITDA. That EBITDA multiple seems more appropriate for a "no-growth" situation. I am sure Mamut hopes to get margins back up post acquisition.

Mamut trades on the Oslo Stock Exchange and I do not own any of it.

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October 8, 2006 | Posted By : Paul Stapleton at 2:56 PM PERMALINK | Blog Comments (1)

Whether Software or Service Company Akamai is Way Overvalued

Akamai Technologies (Nasdaq-AKAM) is priced at about $51.00 per share giving it an enterprise value of $7.72 billion.

If one annualizes the quarter ending June 30, 2006, Akamai has revenue of $402 million, EBITDA of $95 million and Net Income of $45 million. Therefore Akamai is trading at 19x revenue, 81x EBITDA and a P/E ratio of 171x.

So at current prices, if Akamai's operations performed the same in perpetuity, it would take Akamai 81 years to give an investor all their money back. That is a return on investment of a little over 1/10th of 1% per year. Obviously investors think Akamai will perform better. It is already expecting 50% growth next year.

Is this a sustainable long term valuation? Akamai would have to grow 50% per year for about 5 years straight AND preserve existing cash flow margins in order to begin to start to enter a zone that wold justify an $7.72 billion valuation. (Assume a $500 million cash flow in 5 years trading at 15x cash flow. Still an amazing multiple for an Internet-based network services company but not a software company.)

Don't misunderstand, I am not arguing Akamai is a bad business. Akamai is in fact a great business. Today it is the provider of choice for delivering digital media to the network edge. Everyone needs faster streaming media. Akamai says it does it 2.5x faster other providers.

Akamai can do this because it has 20,000 servers in 2,800 locations in 660 cities on 1,000 networks in 70 countries. It has global scale. Equally importantly it owns and licenses some special sauce that "predicts" user requests and therefore reduces data requests that flow over the Internet.

This scale and proprietary intellectual property allows Akamai to enjoy gross margins of about 78%. It is only forecasting a capital expenditure requirement of $50-60 million next year, a little more than this year, and not much for a network with $600 million in revenue.

Those margins are the margins of a software company. Akamai CEO Paul Sagan likes to compare Akamai to big software companies. He recently told analysts, "I think the number today (i.e. software companies) is 15 that have $1 billion in revenue. That's the club we are going for."

I simply believe these margins and growth are not sustainable. Another way to say that is I believe in the long-run Akamai is more like a Service than a Software on the SAAS continuum? This means I believe as competitors enter the market (and what IP network does not want a faster network delivering digital media and applications?) Akamai's margins erode and growth slows. I don't believe the intellectual property or scale are sufficient defenses. Sixty million in capex is a rounding error at some networks and all network are getting faster at content distribution every day.

I could be wrong but I own no Akamai shares. For full disclosure neither do I have a short position in the stock.

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