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HostingCon 2014: Understanding Valuation – How the Big Guys Do It

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Mergers and acquisitions in the hosting industry have always been a topic of interest at HostingCon. Over the past eighteen months, however, there have been several notable transactions that have helped service providers including GoDaddy reach new markets and new customers, as well as attain new talent.

In a panel discussion on Monday, moderated by Frank Stiff, president of Cheval Capital, Hillary Stiff, managing director, Cheval Capital; Greg Wong, CEO of Web.com; Jeff King, GM of Hosting, Commerce and Security at GoDaddy, and Eric Cooney, president and CEO of Internap Network Services, discussed how they determine valuation of an asset, and some of the key considerations when acquiring a new company.

Cooney says that in acquiring Voxel, Internap looked to solve a product gap, while with iWeb, the problem that acquisition was trying to solve was its issue with route to market. The iWeb acquisition, Cooney says, was “strategically necessary to succeed.”

King has been a part acquisitions of a diverse set of companies, from one-person shops to companies like Media Temple with several hundred employees. With M.dot, King says though it was a small company, it had a good technology team. The acquisition of Locu gave GoDaddy access to “an unbelievable talent pool in Cambridge.” Media Temple understood a customer segment that could extend GoDaddy’s presence into something more technical.

According to Wong, Web.com looks at the mission of the company it intends to acquire. There needs to be alignment of the mission and interest in order for it to be a fit.

“I think about it like a marriage,” Wong says. “We’re interested in getting to know the management team.”

In determining a valuation, Wong looks at a combination of intellectual capital and how the company can be scaled.

King agrees that the acquisition should fit into the strategy of the buyer. It is important for sellers to do their homework, and need to know who their customers are. He says he is surprised at how many companies don’t know their customer churn rates.

“We’ve been in deals pretty deep before we know what their churn rate really is,” King says.

Cooney says that sellers need to think carefully about their potential buyer. It needs to be strategically relevant.

Planning for post-acquisition risk is something that is also critical. Cooney says you have to have a strategy in place as though on the day the cheque clears, everyone you deem valuable leaves.

For GoDaddy, it has been successful in retaining talent post-acquisition because the talent are a part of the management team.

Wong says that Web.com wants people who want to be part of what it wants to accomplish. “We look for folks who want to build something bigger,” he says.

Openness of management during the due diligence process was another topic of discussion.

“Credibility is everything,” Wong says. He recommends looking at how they have done deals in the past or how they have dealt with management in the past. “It’s better to get it all on the table,” he says.

“Timing is everything in these,” Stiff agrees.

One of the red flags that King has seen in acquisitions is a company that is “religious” about the tech. The company needs to be ready to “build the next generation of something.”

“It’s fundamental to have founders focus on the bigger picture,” he says.

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