Corporate mergers and acquisitions of the new companies has dominated the agenda in the web hosting industry since January 2006. The large investment flew to web hosting business after an year of standstill. The web site analysts Netcraft reports that while most of the deals have been led by private investors, some companies like GoDaddy and Hostopia are planning to Initial Public Offerings.
We’ve seen that business sees mergers and acquisitions as a key step to the growth. But what is the customers’ perspective? Does the large investment bring a knowledge that would increase a customer satisfaction?
According to Hillary Stiff of Cheval Capital “The acquisition market is heating up”. Cheval Capital is an Alexandria, Virginia based investment banking company, focused on web hosting industry.
The company’s analysis show that it is getting harder for businesses to get new customers so those involved in web hosting business are looking to buy companies.
The other investment firm, DH Capital LLC said that the number of companies who are looking to buy a web hosts is increasing. The company analysts explain that debt is returning to the market and there are “more and more exit strategies for capital in this sector”.
Both investment companies say they arranged about 40 mergers and acquisitions during 2006.
Endurance International has been the most active buyer in the web hosting industry. The company took control over 27 different shared web hosting companies within the last 4 years. The company is backed by a fund with $1 billion in assets. It bought FreeYellow, Virtual Avenue, HyperMart and FatCow.
Those who want to sell their web hosting business can expect to receive no more than 1.5 times of the host’s annual revenue. Two years ago however the owners of web hosting companies would expect to sell their business at 6 times their annual revenue.
There are many reasons web hosting companies to loose their value. One of them is the increased number of so-called “hosting businesses” worldwide. The market has been flooded by “one server shared hosts” who claim they provide “the best service”. The tough competition and the increased costs of doing business make many of the bigger companies to buy smaller hosting entities. That’s why it is sometimes cheaper to pay for a server with 300 customers than to get 300 sign-ups on the market.
Most of the smaller web hosts say that their can continue its growth within the next years and that selling at “1.2 times annual revenue” is unacceptable. At the same time they can easy loose their customers and their value in favour of bigger market players.
Investment companies that work in the field of web hosting industry warn that most middle sized web host do not keep records on their financial activities and that lowers their value.
In the middle of the big merger times, smaller hosts have a hard choise to make. They have to be very precise in their estimates if they can stay on the market and to be competitive enough or to sell for a cents.
My advice is not cell if you are sure you can serve your customers! Web hosting industry is still place where real people do job for other real people! So if you can persuade others that your web hosting services are good, you don’t need to sell only because there are others who made the decision that it was easy to buy than to create a hosting company.