Rackspace began trading 11 days ago as of this writing …my analysis.

At HostingCon, during one of the panels the speaker brought up the Rackspace IPO, he bet the strike price would be  $14 – sounds good to me – Another panel member piped in confidently “I bet it’s $12” – sounds good to me.

We all enjoy the water cooler, on stage you have to say something memorable. Now we know that Rackspace is trading around $10 - about a 20% drop from the IPO day.  The sky is falling. Regardless of the first few baby steps Rackspace is still a good company, still good price and was a good deal.  Unless you actually bought at the IPO price (sorry by the way) you don’t care.

One of my clients called, he had reviewed the Rackspace IPO.  He told me that Rackspace sold for 4plus X 2007 revenues; this is a valuation  – sounds good to me.

Actually my client fully recognizes the Rackspace value does not apply to his company. Even though the product lines are almost identical, how do you compare a $6 million firm with Rackspace at $500 million? Don’t spend too much time doing this exercise.

One of the articles I reviewed for this in-depth analysis wondered why Rackspace went public in this down market.  It stated Rackspace has some great investors like Norwest Venture Partners and Sequoia Capital suggesting they should have advised otherwise – I guess they let Rackspace down.

That’s not the venture capital groups’ job. Their job is to take risk and obtain reward. The Investors cashed out, nothing wrong with that. You can’t stay in forever. They took a bet on Rackspace management and vice-versa.

Should not the underwriters (Goldman, Sachs, Credit Suisse et al) advised Rackspace management to hold off the IPO in this down market?  Ethics battle – Aristotle vs. Kierkegaard

I can see the meeting now..."...markets off a bit – of yes Rackspace, should we consider moving back…"

Did you know that most of the underwriter’s fees come from pushing that $400 million in stock out the back door?

This is now history.  All motivations have subsided. It was a good deal as all parties, including the new shareholders who got what they bargained for. 

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Having the enviable position of being scheduled on the last HostingCon day, last hour, last session and bumped up against the Bar-B-Q, - I was pleased with the turnout.

The following is a quick overview my presentation: “Flip that Hosting Company”.

I developed two fictional web-hosting companies. Each of which; Started the same year, have the same product lines, same revenues, often the same expense items and many other like items. In some respects, like twins separated at birth.

In a 15 slide presentation we reviewed: Ownership, Revenue/ Subscribers, Growth, P&L, EBITDA and Balance Sheet. Enough detail to provide a buyer with direction.

The goal was to find the dynamic, obvious and subtle differences between the companies that would add or detract the sales price, items that could help or hinder negotiations and motivational issues – all in the context of the buyer and seller. Tucked away were over 20 points and clues that could influence a possible transaction. Some were easy to find…

I thought that was enough to squeeze into 45 minutes. I touched deal structure, but really left it and valuations for another day.

I believe my presentation was well received. This was confirmed by the “convention/seminar” adjusted Clap-O-Meter. Let me refresh your memory; Level 1 – No Clap; Level 2 – End of Finger Clap; Level 3 – Hard Clap Air in Palms, and Level 4 - #3 with people standing and dancing on tables. We were a Level three.

Hopefully I can do this one again.

DO YOU WANT the presentation? Please e-mail me direct and include your contact information. -- Tom

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Conventions aren't just about the meetings, the exhibit floors, the deals, the lunches, the drinks, the food or that business card whereon you wrote those important notes in SandScript. It's about bathrooms.

No, not Navy Pier, they understand “restrooms”.

I am talking about the W, not as in George W, but as in W Hotel. The HostingCon 2008 Convention hotel of choice.

My room came with a 50 page annotated instruction manual; everything is named with a “W”. The room is like a Zen garden. It has a therapist’s couch in the corner and a black cube pillow on the bed.

Back to the bathroom: About four feet from “my side ofthe bed” is the wall between the bedroom and the bathroom. No problem, except some moron decided us Zen Buddhists must like windows in the bathroom – I did not say glass – it is a Zen hole in the wall. Yes hole in the wall. It has caused a few problems in my otherwise blissful marriage.

If you are staying at the W and need dinner weservations dial ext. 8 for the Woncierge.

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ONE DAY LEFT - On Wednesday attend my M&A Seminar Flip that Hosting Company at 4:30 PM.

Another convention, another time, another day. It started off like so many days before. That half a**ed shower, the Monster Loco Mocho energy coffee drink and obvious Nigerian cabby talking without a breath on the cell phone until I heard "$7.30".

Yes I’m back in that toddling town, the city of big shoulders, that windy city…yes - Chicago.

HostingCon 2008, you could smell it in the air.  Like locusts the attendees tried to find the back end of  Navy Pier. Registering they produced two forms of positive identification and matching business card to obtain their tricked out badges. You would almost think they were trying to vote or something. I call it organized.

 Working against the clock we poured coffee (Got to give Navy Pier a  thumbs up on the coffee) and chose from a wide selection of assorted do-nuts and Danish. On to a 9 AM panel. It should be an interesting day.

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At HostingCon attend my M&A Seminar Flip that Hosting Company

Ever since the hosting industry was born the rate of inflation has been low. Historically speaking today it is considered moderate, hovering around the 4% mark.

Well everyone is complaining  so ...how can that be? Most people have either forgotten what it was like 25 years ago, or are just not old enough to really have experienced it. We like McDonalds.

Then those gas prices...news, news, news, blah, blah, blah

Given the current perception of reality all prices have gone up 30% in the past year...well gas did, so that is logical.

TAKE ADVANTAGE OF THE SITUATION. Raise your rates. It is easier to do so today during these high inflation times (4.18%) then when inflation is low (2.5%).

Some reasons to raise your rates today ---- or at least some great reasons and excuses:

• Our electric bill is going up...”energy you know”
  
• We are investing in alternative energy sources…”everyone has to help”.
  
• Due to energy prices more people are using the Internet. Demand for Hosting and bandwidth has never been greater…”you are actually a winner”...or.."The world appreciates you."
  
• We went Green (always use the capital "G") and are passing just a fragment of the cost on to our customers..."Thank you for helping!"
  
• We are reducing our carbon footprint…”Do you know what carbon credits cost today?”
  
• Your client is vacationing at Disneyworld...Tickets (no air, hotel, tips or gratuity) for his family of 4 is about $300 day...your increase is peanuts.
  

I usually think that the first of the year is the best time to raise rates. It should be an annual event. But with gas, airfare, luggage surcharges and Budweiser increases - now is the time to jump on board.

After all, AOL just raised rates 20% - they have always understood perception.

 

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At HostingCon attend my M&A Seminar Flip that Hosting Company

I have been reading some great data about web host firms going green. Power from alternative energy sources, buying those carbon thingies. Wind, rain, gravity, solar winds, being more efficient, telecommuting, all those enchiladas.

The US Government is building a massive data center in the bottom of a quarry in West Virginia. After its complete, gravel will be back filled in and apparently natural water will circulate. A great way to off load all that data center heat and shield yourself from a nuclear incident at the same time, a twofer.  Green I would say.

At home we have gone greenish. My wife has me using those cloth bags at the grocery, holds 12 packs of Moosehead really well, square no sag, strong handles and some insulating properties. We use a sailboat vs. motorboat.

It is hard to find a way for a company like mine to go greener. The A/C is already up to 80, the hot water heater is turned off (In the summer you can do that in Florida) and we turn off the printer at the end of the business day.

So I want to buy a new green CAR …which is why I wrote this blog...so you would click on the word CAR.

We are all learning how to dump the box. 

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I am moderating a panel at HostingCon entitled "Flip that Hosting Company" (Wed. July 30 - 4:15 PM). I want to have at least one panel member from our WHIR readers.

So be on my panel. If you think you are up to it, there are just a couple of hoops to jump through.

1 - Requirements: During the last 5 years you should have completed at least 3 acquisitions, your current position is either in senior management, or you are responsible for business development for an operating hosting firm.

2 - How to apply - send me an e-mail that includes:

    A - Your Name/Company/Title/Phone and link to your website.

    B - Write a couple of paragraphs on what you bring to the table. How you will add value for HostingCon attendees and a snippet of your background.  

    C - A paragraph regarding a specific point you look at (or reared its ugly head) during an acquisition, and why it was important to your decision making process.

Brevity and succinctness are virtues.

All applications are due on or before by Monday June 10th.  BTW I reserve all kinds of rights including not to select anyone.

AND THE WINNER RECEIVES…a free pass to HostingCon.

I can't wait...Tom 

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April was a bit more active than March. I am getting some good "vibes" pre HostingCon and ISPCON was better than expected. My firm closed a couple of transactions which is always nice. So here we go...

Laguna Niguel, CA -- Alentus Corporation (ALNS) acquired Austin, Texas-based Website Source, Inc. (Shared) and SpeedFox, Inc. (Dedicated).  The deals add $2.6M in annual revenue to Alentus. Tom Millitzer President of NCC-New Commerce Communications (This blogger) represented Website Source and Speedfox in the transactions.

Dublin, Ireland - Digiweb, has acquired web hosting Novara, as well as its host.ie and register.ie brands. Digiweb serves 22,000 hosting customers, 32,000 broadband customers and has 140 Employees.

Boston, MA - ABRY Partners acquired Raleigh, NC based Hosted Solutions for $140 million. Hosted Solutions has several East Coast data centers and provides managed services. Paul Stapleton of DH Capital represented Hosted Solutions in the transaction.

Scottsdale, AZ - Vilocity Interactive Inc. recently expanded its client roster and presence on the East Coast with the acquisition of a Boston-based WebNesting a hosting and site development firm.

San Mateo, CA – SAS provider Etelos, Inc.   (Public, OTC: ETLO) completed reverse merger into Tripath Technology. Company has a market cap of $210 million.

Nottinghamshire UK - Timico Group acquired Twang.net Limited, a UK-based a specialist in fully managed solutions.

Renton, WA - Parallels, has acquired ModernGigabyte, the ModernBill automated billing system and other hosting automation solutions. ModernGigabyte provides software to nearly 15,000 hosting resellers with more than 2 million customers worldwide.

Plano, TX - Layered Technologies, Inc., acquired of FastServers.net, a Chicago-based managed hosting company. I ran into FastServers founder Ian Andrusyk at ISPCON…he was very relaxed.

Mississauga, ON - Hostopia (TSX: H) acquired the customer assets of Web hosting provider Luxomovera, operating as uplinkearth.com. Reportedly an all-cash offer that will migrate some 12,500 customers Hostopia's facilities.

Fairfax, VA - mindSHIFT Technologies acquired Collaboration Online, better known as groupSPARK. Collaboration Online provides Shared & Dedicated Exchange data center and other server side services.

Obviously not all inclusive - but from the NCC files.

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This is a no-brainer that can be hard to do. Family, friends, schools, pets all figure into the situation. But is should be on your plate.

Here are some of the top rates for state income taxes; Vermont 9.5%, Oregon 9% and New Jersey 8.97%.

Now there are many other states with high state income taxes. The California State Motto is Eureka "I have found it!" is aptly stated. After all California has a 9.3% state income tax rate plus a 1% kicker imposed on taxable income over $1 million. If I read the tax codes right that equals 10.3%.

Since it makes my case, let’s look at the worst case. You net $500k from your hosting business. In California you pay about $45k in state income taxes and another $155k in Federal Income Tax. So 40% goes to the government. Not to mention FICA, 8.5% sales tax etc.

So you decide to sell the business, it sells for $5 million. In California that adds about $500,000 of your money to the state coffers. You get $500k less. Your retirement fund just dropped $500k. That Ivy League school for the kids is a bit tougher to handle.

Do some family planning. Move to Florida, it has zero, nada, and no state income tax. So does Alaska, Nevada, South Dakota, Texas, Washington and Wyoming.

Now the M&A Part – Buyers don’t make up for the sellers shortfall. It is just as easy to buy a company in Texas as in California. Think this one over for a while.

So talk to your attorney and accountant, make sure everything’s legal and makes sense. Then come on down to Florida a couple years before you sell. You could add some $600k to the retirement fund. Oh yes, real estate is a bargain since the bubble burst.

Written from Cape Coral, Florida - Rather than our old Milwaukee diggs (6.75%)

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In Superman III Richard Pryor is a computer programmer; he wonders where all those ½ cents at the end of payroll checks go. He puts them to good use...his paycheck. 

Charles WU - head honcho at CW Labs made one of those ISPCON luncheon presentations that was actually interesting. In the middle of it I thought...this guy looked at something boring...and saw billions. All of a sudden it became very interesting. 

Unbeknownst to us he noted the slow death of dial-up. But sees dollars in that slow bandwidth...forget 56k...he likes 28k. Forget something in the future that may not work like 500 HDTV channels over the Internet, R&D is always a *itch...lets make some money.

During the presentation Charles used the word trillion...his graphics showed a bunch of lines connecting each other, sort of like a half circle, with arrows going back and forth. His R&D staff has invented some stuff, they want to put the ISP in this graphic. Somewhere near the top left, second dot down. He called it the money spot.  

Charles WU wants to put the ISP in the credit card processing system. He wants you to be part of that trillion dollar economy, the part that takes a ½% here and ½% there. Swipe that card and a bunch of people takes a slice of that swipe…someone has to do it.

Talk to WU if you want to understand the technical part, not my area. However there is hardware, software, intellectual property, licensing and other stuff involved.

In the evening Wu kindly gave away food and drinks as we gambled at a charity event. Everyone was happy.

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Possibly you have seen the TV drama NUMB3RS (CBS Friday) and met Charlie Eppes. He is that ex-child prodigy that riddles off obscure math theories and saves the day for the FBI and that guy from Northern Exposure.  There is always an algorithm in the mix, you know the stuff you and I write in the mist on the shower door.

Enter stage left is Julie Bellancam a real life Charlie Epps, but in the guise of a mild mannered MIT grad. That Julie Bellanca the Product Design Director for Cleversafe. Julie Bellanca  the articulate, intriguing and driving force leading a Cleversafe team of almost 40 (probably also MIT grads) that have written some great algorithms that may have the chance to reinvent the data center industry

She actually used the word “slice and dice data”……when she told me “Our technology, called Information Dispersal, works similarly to TCP/IP packets--that is, we store information on data slices, storing these slices on a network of local or remote servers. So, information is, well, dispersed.” Words actually from the website but it sound just like Julie.

So what is the big deal? This is how I understand the magic…Lets say you are a data storage firm and have three big data centers (you don’t have to be big but I like big number3s). These three data centers each have 33,334 servers. You own 100,002 servers. 50,001 of them are in some effect useless because they back up the data for the other 50k.

One server goes down ----- ok a whole data center gets hit by a tsunami…global warming is everywhere.   Live is good, the server in Austin has the data lost in San Diego (sorry San Diego), yes the critical data for Abercrombie & Fitch is saved.

Cleversafe has another approach --- and you only need 50,001 servers. You stuff the data in small slices in maybe 18 locations. When the tsunami hits San Diego,  Cleversafe’s equipment, software and knowledge can fill in the blanks…you lose nothing…you save 50,000 servers. Algorithms…magical recreation. Are these mathematicians or alchemists?

Cleversafe released this product in Q1 2008. Neat stuff, new stuff, you want one.

And now you know how they fill in those little data holes in the opening of NUMB3RS.

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I host an M&A seminar at 4:15 at ISPCON this afternoon (5-14-08) 

At HostingCon attend my M&A Seminar Flip that Hosting Company