The tale: Hillary Stiff of Cheval Capital (Competitor of my firm NCC) and self proclaimed "buyer's broker" made a presentation at HostingCon. Paul Stapleton of DH Capital (Also a competitor of NCC) used several pages of Ms. Stiff's HostingCon’s presentation, with permission and fully disclosed, at his Tuesday luncheon presentation at HostingCon. Paul stated that the analysis of Ms. Stiff was based on many "…Rat's ass cheap" transactions.
It sort of was like a Pirate not caring about tomorrow as Paul stated "rat's ass cheap". I raised my hand and basically said NCC (my company) agrees. Frankly Paul is fairly mild mannered, Paul broke out of his shell.
Paul's major point was that Ms Stiff used many cheap transactions in her analysis that implies web host company values are dropping. Paul was basically indicating that if you include as a primary component in the analysis many "rat's ass cheap" deals that it deflates the true market. Apparently from Paul's perspective Stiff does many deals that fit this new category.
About 6 years ago I observed that during a presentation at ISPCON a "buyer's broker" analysis provided valuations which were consistently 15-20% less than I was experiencing in the market. Bottom line is that I presume that a "buyer's broker" would not be serving the best interest of their client (the buyer) by obtaining a full market price. Recently I have had offers from "buyer's brokers" that are in excess of 30% lower than the final price.
As a clarification – my firm (NCC) represents sellers.
Paul Stapleton is one of the panel members on the M&A panel I am moderating on Wednesday, I hope this session will be as enlightening as the fabled luncheon.
HostingCon Wednesday – I will be moderating a M&A session at 3:30.
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I appreciate the coverage of the presentation. I'm told all press is good press? Since this is a blog (and I have received several comments about these comments) I thought I would use the reply functionality to elaborate on a point or two.
I think Ms. Stiff provides excellent banking services. And her aggregated data is probably extremely accurate. It matches our data closely and she has done many deals.
I believe the problem with industry data today is, it does not include M&A activity from large, healthy hosters because there is almost no M&A activity among healthy hosters in the $5MM to $25MM range. It is made up of, to again use my precise vulgarity "many rats ass transactions".
I believe it will take higher valuations to get the bigger deals done. Buyers should be talking about what they will pay to buy these businesses, not pointing to transactions that are not from comparable businesses.
I put up two of Ms. Stiffs slides that show declining valuation metrics for hosters to make a point. Although the historical numbers are accurate, I strongly disagree that the difficult past extrapolates into a difficult future.
The best way to make the point was to show the slide and address the bullet points. Ms. Stiff's two charts have been a fixture at shows such as Hostingcon, SWSoft and ISPCON for at least 2 years now. I believe it is healthy for the industry to use them to debate one's point of view on valuations.
The bullet points argue that valuations are depressed because of the following industry trends:
- no revenue growth
- higher churn
- price pressure
Our data from middle market hosters is exactly the opposite of the above points.
We see a +/-3 year trend of:
- revenue growth
- low churn
- rising ARPU (Avg revenue per unit)
If the above trends are sustainable valuations WILL GO UP.
Everyone in the industry will be happy to see that happen, buyers and sellers alike. It will simply give everyone more options for continued growth and wealth.