BUY BUY BUY - Web Hosts Firms On Sale

by Tom Millitzer

I was struggling writing a blog about web host valuations - you know the measurements, metrics and other forms of long division (A blog which I will write sometime.) when I was saved by news on the radio....and confirmed on Fox...

Web Hosting Companies on sale...it was all over my news.

At noon this date (January 22, 2008) web hosts firms are on sale. Companies had the ability to purchase web host firms today for a price less than yesterday.

This is 100% the truth - and will act as a short primer on valuations, the long division stuff I keep harping on.

About 11AM today the Fed lowered the benchmark overnight lending rate to 3.5 percent from 4.25 percent, the Fed wasn't even going to have a meeting for a week - took everyone for a surprise.

Earthshaking stuff, a 750 basis points (3/4%) cut is massive...check out your cc bill or mortgage in a couple of months and multiply by 100 million.

How does this web host savings work Tom? Thought you would never ask.

You see a lot of people (FOR EXAMPLE PURPOSES ONLY ---- I DON'T BELIEVE THIS VALUATION) throw around a value of 1X annual revenues (12 months) as a value for shared hosting companies --- they have for quite a while --- they will tomorrow.

Now a buyer, borrowing money to buy the web hosting company, has around an 8% savings in juice today over yesterday - money that could be used to pay for the acquisition. For the buyer this is a bargain as he/she is still buying at the 12X tomorrow (Because someone believed value metrics are static) just like they did yesterday -- talk about a discount -- the web host company is on sale.

There is a lot involved in valuations -- valuations are largely a factor of the ability to use cash (Cash before DAIT, EBITDA etc.) If you need cash to pay debt you can't spend as much up front -- lowering valuations.

But what will the buyer do with that extra money? What will you do with your cc or mortgage savings? You buy more stuff - the host company buyer buys more hosting companies - supply side economics.

Oh yes, in my opinion web host values will go up due to this.

Suggested additional reading in this tutorial: The Ultimate EBITDA