Going, going, gone: Go Daddy sells to KKR

After canceling a proposed IPO in 2006 and reportedly being on the block since late last year, The Go Daddy Group is now selling an undisclosed stake to private equity firms KKR, Silver Lake Partners and Technology Crossover Ventures. The deal is believed to be among the largest private equity investments in the Internet infrastructure industry, and continues an emerging trend of buyout shops acquiring mass-market hosters and repositioning them toward higher-end services.

Reportedly worth $2.25bn, the transaction lands squarely in second place among the largest PE investments in this industry. We note that the first-place prize goes to a group led by Silver Lake (and including KKR) in the $11.3bn take private of SunGard Data Systems in 2005. Silver Lake’s interest in the industry is increasing – the Go Daddy deal comes less than a year after the firm took a minority stake in a similar hoster, Brazil-based LocaWeb.

We expect that KKR and the other investors will focus on international expansion as well as investment in cloud services. Silver Lake’s stake in LocaWeb could be particularly useful. The Latin American hosting and colocation markets are seeing increasing interest (heavyweights Savvis and Equinix have each announced plans for the region). We wouldn’t be surprised if LocaWeb and Go Daddy ultimately became partners. Further, we’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. LocaWeb’s cloud services could provide additional expansion opportunities for Go Daddy, which recently began a limited launch of its own cloud product. We’ll have a full report on the Go Daddy deal in tonight’s Daily 451.

Take two for SunGard Availability Services

Contact: Ben Kolada

SunGard recently disclosed that it is taking a second look at divesting its Availability Services (AS) division. The company first attempted to shed the AS segment in 2004, but the move was canceled when SunGard was acquired by a consortium of private equity firms. The unit contributes slightly more than one-quarter of SunGard’s total revenue, and, like the rest of SunGard’s business lines, has seen a decline in sales. However, the AS division has proven more resilient than the remainder of SunGard’s businesses; the revenue of those three units combined has dropped nearly 8% in the first nine months of this year, compared to the same period last year.

Meanwhile, sales at the company’s AS division fell only about 3%, due in part to declining demand for disaster recovery (DR) services. If cut free, we expect that the independent SunGard AS could focus on and invest in its managed hosting, cloud and colocation businesses, which, over time, would more than offset losses from its traditional DR services. In particular, the division’s managed hosting services have considerable room to grow, as we project that global revenue for that segment will increase 20.8% in 2011.

SunGard AS is already investing in cloud and managed hosting services, as well as refining its geographic focus. We recently wrote about the division extending the capability of its cloud computing platform to provide an enterprise cloud service, and noted the appointment of Andrew Stern, former CEO of managed hosting provider USi, to its chief executive seat. As part of its geographic realignment, the company sold its South African operations two years ago and acquired Irish managed hosting provider Hosting 365 this past March.

The Art of hosting

Art Zeile is at it again. The private equity arm of Wachovia recently bought privately held HostMySite for an estimated $60m. Wachovia Capital Partners has tapped Zeile and his management team to lead the company, and intends to aggressively grow the venture through further acquisitions. Despite an unfavorable market for M&As, both Wachovia and Zeile are very bullish about going on a shopping spree. And they have a pile of cash – to the tune upwards of $150m – to do so. We hear that talks are already under way. But while awaiting official word of forthcoming deals, we take a stab at identifying some potential candidates.

Although it’s in a unique position as one of the leaders in the niche managed dedicated hosting space, HostMySite is currently not a heavyweight by any means. It is running about $20-25m in revenue at the moment. Nonetheless, it is the future prospects and track record of the new management that have Wachovia and a few other undisclosed investors so willingly parting with their money. Zeile and his team founded Inflow Inc in 1997, successfully navigated it through the bubble era, and with a few strategic acquisitions turned it into a $70m company. Inflow was sold to SunGard Data Systems in early 2005 for almost $200m.

The managed dedicated hosting sector has seen a lot of consolidation over the past few years. One of the main reasons for this is the prevalence of on-demand and outsourced hosting. The dominant players in the space are looking to build up scale and expand geographically to better meet their customers’ increasing needs.

According to insiders, HostMySite is looking at buying up small to medium-sized companies with revenue greater than $10m, largely focused on managed dedicated hosting. It has a preference for companies based in the West and Midwest, for geographical diversity. The market is littered with hosting providers, but few that fit those parameters, especially ones focused mostly on managed dedicated hosting. We did manage to come up with a few potential targets: LiquidWeb, ServePath, and INetU. All three are making names for themselves in the managed dedicated hosting space – but with revenue between $10-20m, they’re still small enough for a potential acquisition.

Frankly we would be surprised if at least one of these companies wasn’t acquired in the near future, either by HostMySite or another company. In fact, given the revenue multiples typically applied to acquisitions in this space (between 2.5 to 3.5 times trailing 12-month revenue), all three could conceivably be bought for about $100m – leaving ample cash for future endeavors.

Recent select managed hosting acquisitions

Date Acquirer Target Deal value TTM revenue
April 2008 ABRY Partners Hosted Solutions $140m $39m*
December 2006 Fujitsu Services TDS AG $132m NA
June 2008 International Game Technology Cyberview Technology $76m $53m
February 2006 VeriSign 3united Mobile Solutions $65m NA
April 2008 Layered Technologies FastServers.Net $13.5m* $9.5m*

Source: The 451 M&A KnowledgeBase * official 451 Group estimate