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Germany’s United Internet bought web hosting company Strato, owned by Deutsche Telekom. According to the reports in the press, United Internet paid for around €600 million ($629 million) in cash. It takes on 2 million customer contracts and approximately €130 million in annual revenue. This another step toward consolidation of the European web hosting market. The company already owns popular web hosting, domain registration and online service brands 1 & 1, FastHosts, InternetX, Sedo, Web.de, GMX, Mail.com, etc.

Ralph Dommermuth, Chief Executive of United Internet explained that the acquisition of Strato will make possible for his company to expand its position on the “European hosting and Cloud application business”. He also added that such deal “drives the consolidation of a market which is currently still strongly fragmented”.

The deal is backed by a private equity group Warburg Pincus, which values Strato at 12.4 times earnings before interest, tax, depreciation and amortization. According to experts this valuation is in line with the with the multiple that American web host Godaddy paid to acquire Host Europe Group (HEG).

United Internet has also been interested to buy HEG, but eventually switched to the Strato deal. According Reuters the equity group Warburg plans to inject additional €50 million into the business applications holding as part of the Strato deal. United Internet’s owns popular web hosting provider 1&1, which is among the biggest in Europe and within the last 5 years has significantly grown its business in the Unites States.

What Are Stato’s New Owner’s Expectations?

United Internet hopes that it will be able to attract small and medium German businesses to as clients by selling them various services – from websites, e-commerce solutions, CRM apps, security services and etc. The company is also looking forward to continue its web hosting acquisition business in order to consolidate the European It Hosting market and to.

Is European Web Hosting Industry Going The American Way?

More or less, “yes” as private equity firms and other type of investment ventures poor money to web hosting in order to increase “market consolidation”, which actually means to increase the market share for some big web hosting providers and to reduce the market significance of medium and small business IT hosting and Service providers. Investment funds and financial capital groups applies formula which multiplies the value of each business based on its size and customer base.

The bigger the entity is, the better chance financial groups have to launch IPO and to sell overestimated  shared on the stock exchange. Such approach to business proves to be profitable in a short run. However, when it comes to technology part of the business to the IT infrastructure services and Cloud service delivery, it possesses certain risk. It is all about decision making. After such acquisitions, the decisions are made by CTO’s and professionals who usually have a little to do with the management of IT businesses and processes. The investors and stockholders are always eager to return on their investments. As a result of that the companies increase pricing and the IT management is very often pushed to change the procedures and to impose restrictions and service terms which would make customers to increase their IT spendings.

In European Union, a single market on paper, that comprises of 28 national markets, 28 national languages and various business standards and cultures, it’s very costly and sometimes virtually impossible to apply common procedures and organizational standards which would create a successful universal IT service model. So it is very likely that any “consolidation” of the European web hosting industry to be just a short-lived and unsuccessful attempt to apply the American business practices into the European business environment.

The United Internet’s website does not differentiate from the finest traditions of corporate culture – to produce self-sufficient structures which are focused mostly on bragging about their own success. “With its clear focus on the growth markets internet access and cloud computing, United Internet is ideally placed to benefit from the expected market growth”, says the company’s website.

A Proof Of A Success Story

Posted by The Daw On February - 28 - 2009

value-of-web-hosting-companiesThis is my first article for B10WH after the website has been completely redesigned. I feel a little bit sentimental when it comes to this website because I’ve created under name Best 10 Web Hosting in 2003. But this was only an introduction. My first post here is about a success story I’ve recently wrote in my Daw Web Hosting Blog. the Daw’s publication is titled “Unlimited” Mistakes In Web Hosting“. It is about 1&1, a web hosting company, which originally comes from Germany, that launched its U.S. operations in 2003.

In the beginning of February Cheval Capital, a small investment bank that specializes in mergers and acquisitions in web hosting industry published its valuation of of Public Hosting Companies. Take a look at Cheval Capital’s estimate of the relative valuations of some of the major hosting companies as of February 1, 2009.

Ranked number one per Revenue ($ millions)   and Value/Revenue* is United Internet with $2,081 billion and 1.3 x value/revs, followed by Savvis with $873 million and 1.1 x value/revs.

Rackspace is third with $553 million, and 1.3 x value/revs. Dada is fourth  with $229 million and 0.8 x value/revs.

Navisite ($159 million and 0.9 x value/revs), Web.Com ($122 million and 0.6 x value/revs), Peer 1 ($94 million and 1.2 x value/revs), (Group iWeb ($15 million and 2.0 x value/revs) are ranked between 5th and 8th place.

How Te Calculation Were Made?

Cheval Capital typically look at two enterprise value formulas for calculating the Enterprise Value and make adjustments from there if necessary.

Enterprise Value = (Fully Diluted Shares * Current Stock Price) plus Debt (long and short term, including capital leases) less any option exercise proceeds for unexercised, in-the-money, options included in Fully Diluted Shares.

Enterprise Value = (Fully Diluted Shares * Current Stock Price) less Current Assets plus Total Liabilities less any option exercise proceeds for unexercised, in-the-money, options included in Fully Diluted Shares.

The investment bankers say that the reason why they look at two formulas is because some companies have unusual balance sheet items (e.g. large cash balances, that can distort valuation etc.).

Cheval Capital Inc, uses a multiple of revenue to compare web hosting companies because they have very different capital and operating structures and compete in different niches of the web hosting industry. The investment bank takes all data from public financial statements for the quarter ended September 30, 2008.