hostingcon 2011 m&a 2011 looking to 2012

M&A 2011 Looking to 2012Tom Millitzer - President NCC International

Notes regarding these slides

These slides are from Tom Millitzers HostingCon presentation of August 10, 2011 in San Diego,

California

The presentation was largely a dialog between Mr. Millitzer and the audience that related to

the graphics.The information in this text color has been added in this production to add the dialog and information not

on the original presentation slides.These are a combination of his personal screen notes and that

dialog. Thank you for viewing this presentation

Some comments here were not part of that presentation others were omitted – I can’t remember everything.

Tom Millitzer - President

NCC International

Hosting M&A Since 1997

NCC International


A LEADING M&A PROFESSIONAL SERVING THE HOSTING INDUSTRY400+ SUCCESSFUL ASSIGNMENTS IN THIS SECTOR

NCC REPRESENT SELLERS

DEAL SIZE GENERALLY $500K TO $100 MILLION

WE DO GREAT PRESENTATIONS AND SAVE THE BUYERS TIME WITH OUR PRE-DEAL DUE-DILIGENCE

I WANT TO MAKE YOU RICH


[email protected]

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M&A 2011 Looking to 2012

EBITDA2010 Revisited

Advance of the telephonePrivate equity scales up

SKINGAME CHANGERSINTERNATIONAL

POSITIONING AND STRATEGY

A thing about EBITDAIn this slide Millitzer did a quick review of his EBITDA theory (this presentation was not M&A 101 or lists of things to do during an acquisition - more of graduate

level deal theory and positioning.

Base deal should = 4x 25% EBITDA = 4 year returntherefore a base deal should be 4x sellers EBITDA

but buyers should be able to pay 6x (sellers) because in reality with synergy they should be able to move it to 4x

EBITDA .

Above 6x lies issues such as growth, opportunity, technology, great management team...etc. ----

theoretically there is no top end.

On the heels of 2010In early 2010 I began making a series of predictions in the M&A blogs I write for the WHIR. This related to telephone

companies and the fact that they needed to add services to make up for land lines they were losing. TELEPHONE

companies needed new services for SMB’s to increase average revenue and to what i term “the sticky” ....

I noted we now ride the rails of the IP rails of cable companies network (so do the telephone companies)... get

on board.

On the heels of 2010At hostingCon 2010 I had outlined three

transactions that I thought lead that charge...

The total valuation of these transactions was a paltry $530 million.

As a quick review…

VISI Central Host CyrusOne

...the year of discovery

VISI $18 MILLION 1.6X REV 5.8X EBITDA

CENTRAL HOST $1.6 M 1.6 X 6.4X EBITDA

CYRUSONE $525 M 9X REVENUES 12.5 X EBITDA

Note: NCC International represented Central Host in that transaction.

TELEPHONY I was proven right as the last 12 months have produced

a plethora of activity in this sector.

The following pages outline the specific transactions I felt noteworthy.

2011 the Theme Continues

NOVEMBER 2010- CROSS CONNECT SOLUTIONS (PHILADELPHIA ) GOES TO SIDERA - SIDERA IS A NEW NAME FOR RCN - RCN WENT PRIVATE IN A

MANAGEMENT BUYOUT WHICH INVOLVED ABRY GROUP PRIVATE EQUITY - THIS WILL RELATE TO THE NEXT SLIDE AND PART OF THE PE PRESENTATION LATER


December 2010 Windstream acquired Hosted Solutions (owned by ABRY Partners- see previous slide) in an all-cash transaction valued at $310 million. ABRY bought it in April 2008 for $140 M - Up $170 m in 31 months WITH A CONSERVATIVE 4-1 LEVERAGE we are looking at a 50-

60% Annual return


-December TDS purchases TEAM Technologies, LLC for privately owned upper Midwest data

center services providers, for a purchase price of $47 million or 4.5X Revenues

note: TDS purchased VISI last year


December Cavalier becomes a Paetec Company in a $450m deal worth 1.06X Revenues and 5X EBITDA – Important as Cavalier picked up colo dc assets with its 2010 NET Telcos acquisition.


April Time Warner closed NaviSite $230 million deal represents 8.8X trailing EBITDA and 1.78X

revenues In my blogs I noted they may have got this deal cheap and I was worried about a

cultural clash.


-April 2011 Verizon closed Terremark for $1.4 billion 3.7X Revenues 12X EBITDA accelerating

the company’s strategy to provide “everything-as-a-service” to business and government customers

globally.

Later in the presentation Verizon is referred to as an ISP


In June VoIP firm 8X8 STEPPED TO THE PLATE AGAIN and ZERIGO 8 in a $2 MILLION acquisition - 8X8 WAS ON

OUR LIST OF 2010 BUYERS


Big year for CenturyLink ----on the heels of its merger with Qwest - creating a $18.6 billion, EBITDA of $8.1

billion acquired Savvis $2.5 billion 2.4x revenues 8.3x EBITDA


AUGUST – Just 4 days ago it was announced that Windstream is to acquire PAETEC for $2.4

BILLIONNow Windstream will own Cavalier on of our

other buyers.


2 of the 3 companies came back to the table --- TDS and 8x8 ---- and last week Cincinnati Bell has announced a massive new million sq/ft data center in

Arizona. ALL 3 BACK MAKING INVESTMENTS!


$7.4 BILLIONThis years aggregate equals $7.4 BILLION

----- A 1200% X sector awareness increase by the

telephone sector. Who let these telephone guys in the room?

so how does telephone fit

Lets talk for a moment about telephone companies.....not innovators....never early adaptors....sit in the background

and wait until a basic business has matured....has come of age ------ which says a lot about THE HOSTING INDUSTRY.

Telephone companies buy quality and experience ..... they buy a company to teach them.....they are not afraid to be near the

higher end of the market-----they often have a lot of cash--------- but the PAETEC and Savvis deal were done with

leverage a good sign ------ AS they are willing to risk and have sold

INTERNET HOSTING IDEA TO the banks! --- Which is great in this tight credit market.

2011 Enters Private Equity

Earlier this year in my WHIR blogs i indicated there were murmurings that private equity is back ------ it

is...

but they are looking at a somewhat mature industry now ---- the dot com phase is gone. As we

saw earlier with the Abry deal with Hosted Solutions producing 50% + returns

---- PE - Private Equity is all about the returns –

As I say “take no prisoners”


Phil Male

April 20 , Lloyds Banking Group private equity division LDC partnered with the management team of UK2 group and

acquired a majority stake in the European web hosting provider for about $77 million.

As part of the acquisition, former Cable & Wireless CSO Phil Male joined the company's management team as Executive Chairman.


Phil Koen

May 2011 PE firm Oak Hill Capital Partners buys Intermedia –320,000 premium Microsoft hosted Exchange mailboxes Oak Hill Capital Partners knows the sector, having acquired ViaWest and invested in TeleCity and Cincinnati Bell.... No financials were released. Oak Hill through its various partnerships has $25 billion under managemen

Brought in Phil Koen as Chairman CEO who was of Savvis from 2006-10 and president and COO of equinix from 2002-06 one could

guess he prompted Oak Hill to look at Intermedia


Eric Chouinard

Martin Leclair

Going private from public in a the transaction values iWeb at approximately $47 million.

Canadian Novacap invests in companies the firm seeks to invest a minimum of cad $10 million ($9.4 million). (dovetails to currency shift discussion later- see international) Prior to the deal iWeb was shopped to some 16 firms 5 seriouslyrequired for investor scrutiny.iWeb founders Eric Chouinard and Martin Leclair collectively owned 55% percent of the outstanding shares.


Bob Parsons

Let me be blunt: KKR has $61 billion under management, Silver Lake $14 billion and TVC $7.7 billion. SILVER LAKE JUST SOLD

SKYPE FOR $7 BILLION IF BOB PARSONS IS GODDDY - KKR IS THE GRANDDADDY OF PRIVATE EQUITY THIS IS THE TRIFECTA OF PRIVATE EQUITYTHE DEAL EST $2.25 TO $2.5 ---- MY EST IS $2.6 BECAUSE 2X REVENUES MY GUESS IS 11X EBITDA ---

lets talk about godaddy

We can all guess about the structure of the deal but Ego always has something to do in

deals ---- I suggest that Parsons wanted something like this

BTW THIS CHECK IS A JOKE - THE PHOTO RIGHT IS PARSONS GIVING A BIG CHECK TO A NON-PROFIT GROUP THIS CHECK REPLACING THE REAL ONE.

PRIVATE EQUITY IS ABOUT

Private Equity looks for a great story, finances, the right time at the right place, in this economy a bit of safety, growth..... but that is nothing without a great

management team... they are looking for top management to stay - or as demonstrated can change out the leader with someone that has demonstrated

great leadership skills in the past...

They want motivation ----- and there is nothing like ‘skin in the game to achieve this’

---- not mentioned in the presentation ---- but skin in the game is akin to letting management be part of

the bank - after all Bob Parsons is probably in for some 25% +

PE Phil male

Phil koen

Bob Parsons

Eric Chouinard Martin Leclair

PE OPLE

so how does PE FitThe private equity groups referenced here represent over $100

billion of managed assets...these are groups (and there are hundreds more) they want great returns.... 20-40% the higher the

better

They have targeted the hosting industry as a sector they believe can achieve these goals....

PE started looking at this sector a year ago ---- knowing where the economy was going (600 DOW drop day of this presentation)

PE is SMART MONEYThis bodes well for the HOSTING industry and your values

you will see more

so how does PE FitPRIVATE EQUITY CAN MOVE FAST

GAMECHANGERSGame changers is were a transaction has the

capacity to dramatically change the complexion of the company or in some cases an industry (or both) ---- i think two transactions fall into

that category this year - two fairly recent transactions...

GAMECHANGERS

GAMECHANGERSOur first game changer is the CenturyLink / Savvis transaction... until CenturyLink has been (see previous slide for website shot)) “serving

customers across the nation” Actually serving second and third tier markets

On the heels of the Quest acquisition they went big again with the $2.5 billion Savvis play - They picked up a prestige company - with serves SMB’s to the top fortune 500 firms (by the way we now sell telephone

also) ----

Overnight they have a cadre of hosting services, cloud services,

Overnight they are in some respects the best in the business....

add to this they are no longer national ----- they are international .....

this is a game changer for CenturyLink.

GAMECHANGERS

Although CenturyLink has piled up a lot of debt I could see them doing a fairly large international acquisition in the next 18 months

GAMECHANGERS

Our second game changer not only affects the company it affects the hosting industry --- for this

reason alone it is a game changer---

is more about how it will effect you ----

GAMECHANGERS

VISI Central Host

- POSITIONING

The investors are savvy, the smartest money, the most connected. Together

they have over $80 billion under management - this is a signal to the

entire industry.

GAMECHANGERS

Silverlake has international sector investments it can leverage -Llocaweb is the largest hosting company in Brazil - Allyes is in china -

This deal is also about partnerships and leverage

GAMECHANGERSAlready Godaddy has added an international expert from the White House administration, Silverlake has the who’s who list of connections, other international hosting investments they can leverage

what will happen -

1 -international acquisitions or partnerships will occur

2 - Godaddy will acquire cloud technology to move it from a blue collar to higher end technology company

3 - Parsons plays well in Asia and South America where U.S. macho is respected ---- see him there

4 - Good chance Godaddy will sponsor the World Cup.

5. This signals that the hosting industry is well positioned.

World wide economy

The world wide economy has been shaken this week - yesterday the Israel stock exchange closed early - the DOW this hour is down 600 points ---- all of this comes to play as business contract more often then expand.

We need to consider international as a safety valve..

InternationalConsider overseas acquisitions.

US owners may want to consider exchange rates - as buying into a stable currency - today your Canadian customers are purchasing your services for 7% +/- that they did a year ago

Conversely - if you see the u.s. rebounding - (for example) a Canadian firm can buy a similar us hosting firm at a discount today. This is a world wide phenomenon - i am bullish on the

Netherlands as it has evolved into one of the world wide centers for the internet

Look towards expanding economies with an eye on geo-political issues.

StrategyIf you are larger you have the opportunity to increase value if you are experts at a complex solution.

If you are smaller - do not have the capacity to develop a wide range of staff - stay in the commodity sector (shared, dedicated etc..... work on margins)

ISP’s are back (in the end that is what CenturyLink, Verizon are) --- you have value if you can work on a wide range of solutions and have a great staff --- i would think you would need revenues in excess of $12 million to occur

A deal i wish i had? ---- I would love to sell a pure play cloud company, with complex solutions, great staff that knew there stuff - with revenues of $20+ million --- I think it would be a 3x revenue 12x EBITDA transaction ---- maybe more

[email protected] Millitzer - President NCC International 239.282.5550 -5 GMT

I’m here to help you.

I do M&A – give me a call

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