In Superman III Richard Pryor is a computer programmer; he wonders where all those ½ cents at the end of payroll checks go. He puts them to good use...his paycheck. 

Charles WU - head honcho at CW Labs made one of those luncheon presentations that was actually interesting. In the middle of it I thought...this guy looked at something boring...and saw billions. All of a sudden it became very interesting. 

Unbeknownst to us he noted the slow death of dial-up. But sees dollars in that slow bandwidth...forget 56k...he likes 28k. Forget something in the future that may not work like 500 HDTV channels over the Internet, R&D is always a *itch...lets make some money.

During the presentation Charles used the word trillion...his graphics showed a bunch of lines connecting each other, sort of like a half circle, with arrows going back and forth. His R&D staff has invented some stuff, they want to put the ISP in this graphic. Somewhere near the top left, second dot down. He called it the money spot.  

Charles WU wants to put the ISP in the credit card processing system. He wants you to be part of that trillion dollar economy, the part that takes a ½% here and ½% there. Swipe that card and a bunch of people takes a slice of that swipe…someone has to do it.

Talk to WU if you want to understand the technical part, not my area. However there is hardware, software, intellectual property, licensing and other stuff involved.

In the evening Wu kindly gave away food and drinks as we gambled at a charity event. Everyone was happy.

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Possibly you have seen the TV drama NUMB3RS (CBS Friday) and met Charlie Eppes. He is that ex-child prodigy that riddles off obscure math theories and saves the day for the FBI and that guy from Northern Exposure.  There is always an algorithm in the mix, you know the stuff you and I write in the mist on the shower door.

Enter stage left is Julie Bellancam a real life Charlie Epps, but in the guise of a mild mannered MIT grad. That Julie Bellanca the Product Design Director for Cleversafe. Julie Bellanca  the articulate, intriguing and driving force leading a Cleversafe team of almost 40 (probably also MIT grads) that have written some great algorithms that may have the chance to reinvent the data center industry

She actually used the word “slice and dice data”……when she told me “Our technology, called Information Dispersal, works similarly to TCP/IP packets--that is, we store information on data slices, storing these slices on a network of local or remote servers. So, information is, well, dispersed.” Words actually from the website but it sound just like Julie.

So what is the big deal? This is how I understand the magic…Lets say you are a data storage firm and have three big data centers (you don’t have to be big but I like big number3s). These three data centers each have 33,334 servers. You own 100,002 servers. 50,001 of them are in some effect useless because they back up the data for the other 50k.

One server goes down ----- ok a whole data center gets hit by a tsunami…global warming is everywhere.   Live is good, the server in Austin has the data lost in San Diego (sorry San Diego), yes the critical data for Abercrombie & Fitch is saved.

Cleversafe has another approach --- and you only need 50,001 servers. You stuff the data in small slices in maybe 18 locations. When the tsunami hits San Diego,  Cleversafe’s equipment, software and knowledge can fill in the blanks…you lose nothing…you save 50,000 servers. Algorithms…magical recreation. Are these mathematicians or alchemists?

Cleversafe released this product in Q1 2008. Neat stuff, new stuff, you want one.

And now you know how they fill in those little data holes in the opening of NUMB3RS.

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I host an M&A seminar at 4:15 at ISPCON this afternoon (5-14-08) 

 

I was going through my files --- then again and again ---- March was a slow month…but April will be better – at least my firm did three.

Lynchburg VA – Sitestar (OTC: SYTE) bought the assets of Comcation, an Internet service provider whose services also include web hosting. As a side note Sitestar’s CEO, Frank Erhartic has agreed to be on an M&A panel this blogger is moderating at ISPCON.

Australia -  MYOB acquired Ilisys Pty Ltd one of Australia's larger web hosting providers. MYOB provides accounting software and payroll software to more than 700,000 businesses worldwide.

Glendale, CA -  Pro Net Hosting acquired Homepage Universe which doubled the firm’s size to over 100,000 shared and dedicated hosting domains.

Denver, Colorado - ViaWest, acquired Dallas based Dataside. With the Dataside acquisition, ViaWest's annualized revenue will exceed $100 million by the fourth quarter of 2008.

London -  Freedom4 Communications PLC, signed an agreement to sell its Hosting and Network Services Division to Host Europe WVS Ltd for 120.0 mln stg. ($235m)

Minneapolis -  VISI acquired Infinity AccessNET, a business-focused Internet Service Provider. 

Obviously not all inclusive - but from the NCC files.

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“Certainty? In this world nothing is certain but death and taxes.” Except for not patenting electricity Benjamin Franklin is usually correct.

In regards to the life cycle of your web hosting company his timing is impeccable.

Your company should do everything possible not to pay taxes. You can either give it to the government, great benefit there, or grow your business and hence the economy. Hire more employees (let them pay taxes), spend money on capital equipment and that whole channel line pays taxes. But remember you don’t want your company to pay taxes. Not on April 15th.

Smart and profitable industrialists, hopefully like you, avoid taxes. That is one of the commanding reasons for acquiring a business.  Most web host firms have lousy balance sheets. They have depreciated the assets and have nothing to shield profits, they pay taxes.

I always find it sort of magical that you can acquire an asset (buy a company) that was fully depreciated yesterday, put it on your balance sheet today (stepping up the assets as accounts say) and voila! you have a complete new depreciation schedule protecting your cash. Sort of like asparagus cropping up in the spring, where did that come from?

So you say…“I am profitable but don’t have any money to make an acquisition Tom”. Even a better reason to take out a government loan. That is exactly what not paying taxes is, a differed no interest loan from the government. And if you screw up sort of risk free.  

Now Ben was correct…nothing is certain but death and taxes. In your case the death of your company. Don’t frown, this is just the end of the investment period…maybe the buyer of your company will keep the name, who cares?…your out. Now you want to pay a lot of taxes, big time taxes. You have taken those government loans and parlayed them into your success. As Franklin said taxes were certain, he just did not state when.

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Laguna Niguel, CA -  Alentus Corporation acquired John Macleod’s AO Technologies’ Columbus Ohio Data Center. It is rumored that Alentus is picking up a company across the pond. AO provides high-end dedicated and streaming media services

Leeds, UK -  Masternaut Three X, acquired FibreCity for GBP 6 million ($12 million USD). Deal added 25,000 sq/ft data center.  The acquisition of FibreCity enables Masternaut Three X to provide more extended hosted back-office solutions.

Dallas, TX - Affiliated Computer Services, Inc. (NYSE: ACS)announced an agreement to acquire sds business services GmbH, a Germany-based provider of data center, infrastructure services, and application-related solutions from Waterland Private Equity Investments. ACS will pay approximately $67 million (euro 46 million), including the assumption of liabilities, to purchase sds. The acquisition is expected to close in March 2008 following regulatory approval.

Charlotte, NC - TITAN Technology Partners, a provider of hosted and managed industry solutions, acquired Singapore based ESP Consulting.  ESP operations is and managed services provider focused on delivering SAP solutions.

Belfast, Ireland - IUTV Media plc today acquired of Tibus, a leading Ireland web development company from Anderson Spratt Group Holdings for GBP 5 million ($10 million USD).

Chevy Chase, MD - Opus8 Inc. affiliate, Clear Day Acquisition Corp., has acquired a controlling interest in Lore Internet Systems. Terms of the transaction were not disclosed.  Lore services includes, managed datacenter hosting and co-location. The acquisition has approximately doubled Pro Net's size and it is now providing shared and dedicated hosting for over 100,000 domains.

Sao Paulo, Brazil  - Universo Online S.A. (UOL) acquired the "clients" of web hosting company Digiweb  UOL is now the third-largest provider of web-hosting services company in Brazil. See my March 6, 2008 blog for additional information and comment.

Rochester, NY - Layer 8 acquired the Web hosting and information technology support services branch of DigiNex. RACD

Obviously not all inclusive - but from the NCC files.

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Last week Universo Online S.A. (UOL) acquired the "clients" of web hosting company Digiweb, also of Sao Paulo, Brazil. In November, UOL also acquired the web hosting "clients" of Plug In another Brazilian firm.

The importance:  UOL is now the third-largest provider of web-hosting services company in Brazil.

UOL did not mention the "third largest" part after the Plug In acquisition --- letting me believe that Digiweb was a fairly large deal.

I check out UOL - Basically an Internet/media powerhouse. They are vertical, horizontal, diagonal and the karma sutra all rolled into one. You really have to read the corporate bio --- Brazilian portal with 1.4 billion page-views a month, 1.7 million content paying subscribers, 1 million broadband customers…and now the THIRD LARGEST web hosting company in Brazil (Which I may add has a population of 184 million).

They want to collect the tolls on the electronic highway...including all entrances and exits. Someone has to collect.

The UOL financials…some great info…

• My favorite part: "The Company had no outstanding loans or financings at the end of the 4Q07". (Same position as Microsoft)
• They have a lot of cash - $284 million USD.
• 2007 EBITDA - $91.8 million USD - a fantastic 29% of net revenues.
  

The largest shareholder (41%) is the San Palo newspaper owner Folhapar.

UOL stock has dropped some 60% in the past 12 months...but the one thing I know about newspapers, they are long term players with long term visions. 

And the movie Brazil... 

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First we will start with an alert---because timing can be everything.

Marbles… One of the most important parts of any transaction is how many marbles you get to keep. If you are considering selling your company in 2008, 2009 or 2010 please run down (not just trott, put off til' tomorrow...I said RUN) to your tax accountant. If it would be a stock sale, which frankly you really don’t know today, you could be in trouble.

Why? The Bush tax reductions will soon start to evaporate, specifically the long term capital gain treatment which expires December 31, 2008 ---- yes a short 10 months away. In a stock transaction it could cost you another 5% in taxes.

Well it is only 5% some people may say. Yes but it takes almost 7% to make that up after paying taxes on the incremental amount you need to cover the poor timing.

So if you are considering selling in 2008 you should start earlier than later. And if you are considering 2009 ---- think again.

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Tucows (AMEX:TCX) has lost 50% of its market value since July 2007. Yes it has dropped from $1.26 to $0.63 a share, a 50% drop over the last six months.

The Company just released it’s year end financial statement, so now is a good time for a quick review of the basics:

-    Annual revenues were $74.6 M vs. $65 M for the previous year – up 14%, nothing wrong there.
-    Net Income $2.6 M vs. $2.1 M – up 24% -- direction is good.
-    EBITDA $8.7 M vs. $5.8 M – up 50% -- something to write home about.

Tucows has a market cap of $46.5 million. The overall value could be stated as:

-    5.3X EBITDA
-    .62X trailing revenues.
-    PE Ratio 18.68

So why is Tucows trading so low? Why has it dropped a whopping 50%? As a high tech firm it deserves at least a 40 P/E ratio. It should be trading at a 1X revenue range, frankly more. That would take it back the July stock price.

The problem is the Tucows balance sheet. The Company has $80 million in liabilities. How is Tucows going to make it? Given current EBITDA one could take almost 10 years to pay it back, not including interest. The game is over; tank the deal, time to trade out.

WRONG WRONG WRONG ---- Tucows needs more liabilities, I think liabilities should go through the roof. They should be the master of liabilities; the street just doesn’t get it.

Financially speaking there are not many firms like Tucows. They sell millions of little things, sort of like Coca Cola. However those little things are domain names, selling for lets say $12.  Since they are paid “up front” for a specific period, usually one year, the revenues for these are recognized at $1 per month, not the $12 when the transaction occurred. Sort of like cash vs. accrual accounting.

The bulk of the liabilities time out in one year, when hopefully, they start all over again. Look at it as millions of itsy bitsy revolving loans.

Of the $80 million in liabilities, $50 million (63%) is tied to deferred revenues resulting from domain registration sales. Domain name registrations account for 73% of revenues.

Usually I hate deferred revenues (which is a topic for a separate writing). However for Tucows it is the business model.

I might be naive, but I don't think many people drive up to Tucows and say..."I stopped using my domain name...I want my $3 back". I have a hard time rationalizing how GAAP, in the practical world, should apply here.

Tucows – Has a deferred problem. One the street does not understand, and one I think is holding the stock price down.

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January was a bit slow --- this is often the case as firms often try to close transactions by the end of the year.

Sunnyvale, CA -- Network Appliance, Inc. NetApp (NASDAQ:NTAP) completed the acquisition of Boston based Onaro, a datacenter automation solution company in a $120 million transaction. It is reported that backers put about $9.5 million in Onaro, which looks like a great return.

Las Vegas NV-- Dialpoint Communications Corporation (OTCBB: DLPC), acquired the assets of South Carolina based Hostigation.com. Dialpoint issued 333,334 shares --- a deal which in another blog I noted was worth $50k in an all stock transaction.

Niagara Falls, ON - Canadian based Vision Online Network was acquired by Deli India based Real Value Hosting. Vision Online Network specializes in Windows based web hosting.

Duluth, GA - Ralph Smith's Fat Jack Hosting Acquired HostMyProxies.com, a proxy website host. HostMyProxies.com is based at an undisclosed location.

Dallas, TX – Affiliated Computer Services, Inc has acquired Syan for approximately $60 million. Syan’s trailing twelve-months revenue was approximately $75 million. The transaction was funded by existing cash on hand. Syan has several large data centers in the UK.

Tempe, AZ - Greenstreet Real Estate Partners acquired the Tempe One (Tempe, AZ) data and call center for $30.3 million.

Edmonton, AB, Canada – California upstart Enacten acquired all of the shares of Edmonton based Alentus Corporation in an all cash transaction.  Alentus provides dedicated/managed and shared hosting services. New Commerce Communications (this blogger) represented Alentus in the transaction.
   
Pittsford, NY - Spider Graphics Corporation and ITX, a web technology and hosting firm merged. The new name is Spider ITX, very creative.

Overland Park, KS -  Erickson Solutions Group has bought the client base of Nothing But Net a company that concentrates on Web and e-mail hosting. Hopefully the acquisition will help the Erickson corporate website.

Raleigh, NC - Hosted Solutions has acquired a new data facility, it's second in Charlotte, NC. The site adds 7,600 square feet of floor space.

Obviously not all inclusive - but from the NCC files.

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 Microsoft has never borrowed any money before, the envisioned $44.6 billion ($44,600,000,000) buyout of Yahoo may stain the balance sheet.

All business owners know how tough it is to borrow money. It is especially hard for that first time borrower. 

Bill...we need your last three years W2 statements.

Bill...you started this company with assets some would say were pilfered, please supply documentation.

Bill...we need to pull your FICO score, you can sign this release, by the way we are waiving the $25 report fee.

Bill...we understand you recently gave away $30 billion, we need a cash flow analysis.

Bill...we usually require a personnel guarantee from senior management, how much equity do you have in your home?

Yes - life is tough for first time borrowers.  

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I noticed that Dialpoint Communications Corp (OTCBB: DLPC) completed two acquisitions in January;

The first: Acquisition of Hostigation (Timothy Flavin), an asset transaction where the owners accepted 333,334 shares of Dialpoint stock. This stock has already increased 5 to 20 times (depending how you interpret the agreements) since the deal was inked.

The second: Acquisition of Brian's Computer Center, the press release stated “…the Company will issue unregistered shares of its common stock equal in the amount of 107,843 shares. The certificates representing the shares of common stock will bear restrictive legends.”

Dialpoint has a market cap of $38.6 million.

Am I impressed? Peeling back the onion...

•  Dialpoint has  13.3 million shares outstanding - thats a lot.
  
• The Hostingation deal has a value of $50,000 at closing...a tiny deal
• The Brian’s Computer deal value looks like it was $170,000...another tiny deal.
• The stock increased from $0.51 on 1-17-08 to $2.90 today...thats a big gain.
  
• Dialpoint President  Billy Radford ownes 11.25 million shares...Can you say  $32.6 million?
• Over the last two weeks an average of 3,000 shares/day were traded...why bother.

If this was a deal put before one of my clients I would highly suggest we conduct extensive due-diligence prior to accepting a deal like this.

In these deals there is NO cash. The sellers probably cannot be liquid for at least 12 months, and with the current float it would be extreamly hard to sell the shares.

If you are selling your business I would tell you only to take stock as a small percentage from firms that are similiar to Dialpoint. The stock should be the upside - not the whole banana.

Other than the press releases and a couple of SEC docs I could find out almost nothing about Dialpoint. I will however admit they have been very successful in getting thousands of these two press releases pasted all over the Internet.

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