Interland to Buy Web.com
Posted on November 30, 2005
Interesting news out of Interland this morning. The company is buying Web.com for $4.4 million. I´m "lukewarm" about this acquisition, as explained in more detail below. However, I´m still very bullish on Interland and this acquisition just confirms my thesis that Interland is at the start of a new, aggressive growth period. As explained in my initial write up of Interland, the company is sitting on a mountain of cash, which if invested wisely by the new management can provide a huge return for shareholders. Now on to a quick analysis of the Web.com acquisition and this use of Interland´s cash.
As a shareholder of Interland (INLD), clearly the most important questions to ask are: Is the purchase price for Web.com fair and Is management using our cash prudently?
This is a tough question to answer, since it is difficult to value an intangible asset like a domain name. Interland has not released traffic figures for Web.com and without this I can´t really put a value on Web.com. I will try to call up management to see if I can get some traffic figures.
In the absence of traffic numbers, the only real way to value Web.com is to look at the company´s revenues. Interland noted in their press release this morning that Web.com will add about $900,000 in annual hosting revenue to Interland. So it would appear that Interland is paying about 4.5X revenue for Web.com. This is clearly a sky-high valuation since Interland itself is trading at less than 1X sales (INLD has $2.05 per share in cash and about $2.50 a share in ongoing sales, so INLD´s existing business is being valued at $1.95 per share or about 80% of sales). The only take here is either that INLD´s management team feels that INLD´s hosting business is undervalued, and/or they are overpaying for Web.com (again in the absence of any traffic figures this is the only way to look at this).
My inclination, knowing that there is a renewed bubble in the Internet domain name marketplace, is to assume that Interland overpayed somewhat for Web.com. However, I am willing to cut the management team some slack here because there is one aspect of this acquisition that I like: the new management team is beginning to show their cards. They are clearly going to use their cash aggressively to build up a registrar and hosting business. These are excellent businesses given the recurring nature of revenues. Of course, the industry is extremely competitive (e.g. Yahoo! Small Business, Register.com, GoDaddy.com), but Interland has the cash and existing foundation to make a strong move into this huge and growing market.
Bottom-line: Hold on to your shares. Interland is going to make some big and exciting moves in 2006. The stock will reflect these growth iniatives.
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