Valuation in the Hosting Business
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Valuation in the Hosting Business Paul Stapleton Managing Director, DH Capital, LLC Agenda Who is DH Capital? What is Hosting? Mass Market Hosting (MMH) Enterprise Hosting (MSP) Valuation Methods Public Companies Mergers and Acquisitions Replacement Costs Discounted Cash Flow Analysis

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Valuation in the Hosting Business

Paul Stapleton

Managing Director, DH Capital, LLC


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Parallels Summit 2008

Agenda

  • Who is DH Capital?

  • What is Hosting?

    • Mass Market Hosting (MMH)

    • Enterprise Hosting (MSP)

  • Valuation Methods

    • Public Companies

    • Mergers and Acquisitions

    • Replacement Costs

    • Discounted Cash Flow Analysis

      • Earnings Power

      • Churn


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Agenda

  • Improving Valuations

    • Tracking ROI

    • Channel Management

    • New Products (I.e. growth)

    • Use Acronym du jour

Parallels Summit 2008

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Parallels Summit 2008

DH Capital: Proven Expertise

  • Sole lead advisor in 64 transactions totaling over $1.9 billion

  • Closed 40 M&A transactions totaling approximately $1.4 billion

  • Arranged more than $474 million in 25 private placements

  • Strong relationships with strategic operators as well as private equity funds and financial institutions that support them

  • We have made lots of mistakes (e.g. Misuse of Discounted Cash Flows)


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What is Hosting?

  • For this discussion - Divided into Mass Market Hosting and Enterprise Hosting

  • MMH

    • Products with low price points

    • Highly Automated

    • Large Call Centers

  • Enterprise Hosting

    • Products with high price points

    • Capital Intensive

    • Direct Sales Force

  • Other Hosters - e.g. eCommerce, SAAS, Social Nets

Parallels Summit 2008

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DH Capital Hosting Message

Hosting is one of the best business models in the Telecom / Data-com ecosystem:

  • A recurring revenue business model

  • A “valuable network”, i.e. a network that stores/handles “valuable” information

    • Such as bank accounts, family photos, and web hosts

  • The result is low churn and effective pricing driven by perceived value not costs

  • ROI drivers in hosting are well aligned:

    • Subscriber acquisition costs, margin, churn

  • Extraordinary operating leverage after covering fixed costs

  • Parallels Summit 2008

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    Parallels Summit 2008

    PUBLIC COMPANY ANALYSIS


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    Parallels Summit 2008

    MSP Public Comps Summary


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    Parallels Summit 2008

    MSP Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MSP Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MSP Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MMH Public Comps Summary


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    Parallels Summit 2008

    MMH Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MMH Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MMH Public Comps Summary (cont’d)


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    Parallels Summit 2008

    MERGERS & ACQUISITIONS


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    Parallels Summit 2008

    MSP Deal Flow


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    Parallels Summit 2008

    MSP Deal Multiples 2005-2008


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    Parallels Summit 2008

    MMH Deal Flow


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    Parallels Summit 2008

    MMH Deal Multiples 2005-2008


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    Replacement Costs

    • Balance Sheet is a Good Place to Start

    • FMV of Facilities

      • High for Enterprise Hosting

      • Low for MMH

    • Start-Up Loses

      • High for Enterprise Hosting

      • Low for MMH

    • Typically no Intellectual Property in Hosting

    • Not a Good Tool

    • Will we use it again? E.g. Collocation Overbuild?

    Parallels Summit 2008

    21


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    Discounted Cash Flow Value Analysis

    • View modified in the early 2000s

      • Problems with terminal value

    • Earnings Power of the Business

      • Bruce Greenwald - Value Investing

    • Churn, Margin, Cost of Acquisition

      • Cost of Acquisition = PV

      • Margin = PMT

      • Churn = 1 / n

      • Solve for ROI

      • What about FV?

      • What about g?

    Parallels Summit 2008

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    For Example

    • Churn, Margin, Cost of Acquisition

      • Cost of Acquisition = PV

      • Margin = PMT

      • Churn = 1 / n

      • Solve for ROI

      • What about FV?

      • What about g?

    • Assumptions

      • PV = $100

      • PMT = $5 / mos.

      • Churn = 3.0%

        • 33 months

      • ROI = 39% / yr.

        • 3.3% / mos.

    Parallels Summit 2008

    23


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    Improving Hosting Values

    • Track Churn and Acquisition Costs

    • Understand the Customer Channel

    • New Products up and down stack

    • Improve post-deal integration (virtualization helps?)

    • Know your Sustainable Earnings Power (ROI)

    • Wait

      • Read RAX S-1

      • Change your Name

      • Buy EMC / Short VMW

    Parallels Summit 2008

    24


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    Parallels Summit 2008

    Questions

    Paul Stapleton

    Managing Director, DH Capital

    212-774-3729


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    Parallels Summit 2008

    2008 N. American MMH Deals


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    Parallels Summit 2008

    2007 N. American MMH Deals


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    Parallels Summit 2008

    2007 N. American MMH Deals (cont’d)


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    Parallels Summit 2008

    MSP Stock Prices

    • Major Bullet Point (Arial 24 Bold, Title Caps)

      • Minor Bullet Point (Arial 20 Non-Bold, Title Caps)

        • Next Level (Arial 16 Non-Bold, Title Caps)

          • Next Level (Arial 14 Non-Bold, Title Caps)


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    Parallels Summit 2008

    How MSP Revenue Fared Since 2002


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    Parallels Summit 2008

    How MSP EBITDA Fared Since 2002


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    Parallels Summit 2008

    MMH Stock Prices over last 12 months


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    Parallels Summit 2008

    How MMH EBITDA Fared Since 2004


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    Parallels Summit 2008

    How MMH Revenue Fared Since 2004


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    Parallels Summit 2008

    2008 N. American MSP Deals


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    Parallels Summit 2008

    2007 N. American MSP Deals


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    Parallels Summit 2008

    2007 N. American MSP Deals (cont’d)


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    Parallels Summit 2008

    Churn

    • Return on Equity

      • Cost of acquisition

      • Margin

      • Churn


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