Buying and Selling Specialized Hosting Firms

By M. Eric Furlow

From Web Hosting Monthly, September 2003 Edition

September 25, 2003 -- (WEB HOST INDUSTRY REVIEW) -- In today's Web hosting industry, not all companies are created equal. Many firms have turned to specialized industries, applications and regions in order to sell their services; as such, a unique approach is required when attempting to buy or sell a Web hosting company serving one of these audiences.

When selling one of these businesses, the seller must define who the most probable buyers are, where they are, how large the pool of prospects is, and how interested each type of buyer will be in relation to other buyers. Strategic buyers are typically either involved in the Web hosting industry and want to gain market share quickly, or they are outside the industry and want to bring a Web hosting service into their company for strategic reasons. These buyers are usually competitors or stakeholders in the target company.

Financial buyers, meanwhile, are usually in one of the three categories; angel investors, private equity groups, or venture capital groups. Angel investors are individuals or groups of individuals wanting to acquire equity in a small company. They are either active or passive investors. Private equity groups enter the scene when startups become established firms and invest in either debt or equity. Most venture capital groups enter industries in their infancy, and most have left the Web hosting space.

When finally approached by a buyer, the most important thing a seller should remember is that businesses are not liquid. A share of Exxon stock can be sold in a few seconds; however, the average business owner is lucky to receive three "reasonable" offers from qualified, capable buyers. This doesn't count the five "low-ball" offers, the three buyers who make incomplete verbal offers at an industry convention, or a competitor who has talked a good game for years. The reason sellers receive so few good offers is not because there are only three interested parties, but rather because most sellers don't know where to look for buyers, don't have the time to search for them, waste valuable time on low probability buyers, and aren't sure how to communicate with the good prospects. Sellers should come up with a reasonable value and acceptable terms, and when a capable, qualified buyer comes along willing to agree to these, pull the trigger and sell the company. There is a significant risk in holding out for a better offer. Most buyers will find a company to acquire. If the seller passes on a good offer, it might be the last one.

The level of interest: Specialized vs. General

The seller of a specialized hosting company needs to be careful before even thinking about selling. The number of potential acquirers is typically much smaller than a general Web hosting company. It is likely the owner of a specialized Web hosting company will know the seller long before the proposed acquisition or merger. The specialized host is also typically tied to other specifics that make it a "specialized" Web hosting firm, be it a focus on gambling, adult clients, offshore hosting or other varied customer types, whereas the probable logic behind a general web hosting acquisition is to simply to gain clients and market mass.

For example, a hosting company that specializes in hosting the Web sites of resort hotels will usually focus on many aspects of this specific industry's needs. Because the seller provides customized billing software, reservations, logistics and employment services to the industry, it would be common for a non-hosting company to want to take control of a resort industry Web host. This logic can be applied to any specialized Web hosting company, be it for adult sites or other niche markets.

The owner of a specialized Web hosting company should always keep a list of the potential acquirers handy and develop these relationships over time - hosting M&A can be a drawn-out process. In addition, he/she should always be keen to the different valuations, and more importantly the change in valuations, of mergers and acquisitions in both the general and specialized sectors.

There are typically more buyers for a general Web hosting company, but a specialized Web hosting company will warrant a greater level of interest, and this interest is found in a smaller pool of potential buyers. The key to success of mergers and acquisitions in the specialized Web hosting industry is knowing where to find the most probable buyers and knowing how to communicate with them.