Three Key Questions: Web Hosting in Europe and North America

In this Q&A, Harris Williams Managing Director Thierry Monjauze, Director Priyanka Naithani and Vice President Sylvain Noblet, all members of the Technology, Media & Telecom Group, draw on recent experience and share their views on why web hosting should be on investors’ radar, the latest trends in the space, and what potential participants should know.

Key Takeaways

  • Web hosting is a ubiquitous, global sector, driven by steady and growing demand among organizations of all sizes and purposes.
  • The natural scale and diversity of the sector are creating investment opportunities for strategic buyers and private equity firms.
  • However, the potential varies by location, and industry participants should be aware of the growing power of Amazon Web Services (AWS) and other major players.

See our latest Web Hosting and Managed Services Industry Update for more information, including public comparables, recent transactions and industry taxonomy.  

Q: Why should investors consider putting capital to work in the web hosting space?

Naithani: Hosting providers and related businesses serve a massive and growing market. The total addressable market includes essentially every small, medium and large business or organization that wants to have an online presence. That means there is significant built-in industry and geographic diversification and steady growth—we’re seeing around 5% compound annual growth for new domain registrations worldwide.

Much of that growth is coming from small- and medium-sized enterprises, or SMEs, and small-office/home-office businesses, or sohos. There are a staggering number of those around the world, and, with the digitization of the global economy, most of them are looking to be online. And for most of them, it makes no sense to have in-house IT staff to manage website and hosting.

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Monjauze: I would add that, in Europe especially, web hosting remains a highly fragmented industry, with plenty of opportunities to build platforms of scale. Those platforms tend to benefit greatly from synergies, more than many other sectors.

When small hosting companies integrate with each other, they can rationalize costly IT infrastructure and talent, and move customers to a single platform. They are highly scalable businesses, and that makes M&A an attractive strategy, which, of course, is appealing to strategic buyers and private equity.

Noblet: In addition, private equity in particular is drawn to the fast, low-cost customer acquisition models many hosting businesses have. While there is a fair amount of churn relative to many other sub-sectors within technology, price points are generally low, and sign-ups are fast and easy, so new customers are always coming in the door for the best operators.

Q: Which three to five trends should investors be aware of?

Monjauze: Consolidation is top of mind in Europe. Given the synergies I just mentioned, there has been a wave of platform-building, with several companies emerging as leaders within their respective countries.

The degree of fragmentation varies from country to country. France, Italy, Spain and the Netherlands remain quite fragmented, while the Nordic countries are less so. As individual countries become more consolidated, the bigger hosting companies are starting to look beyond their borders; however, language, regulations and cultural differences can pose a challenge.

Noblet: We’re also seeing increased private equity interest in hosting companies. Last year, two large players we advised, Combell and One.com, received significant investment from private equity groups. As I mentioned before, the business model is highly attractive: large addressable market, easy customer acquisition, and strong recurring revenue, cash flow conversion, visibility and potential for bolt-on acquisitions. In addition, given the scarcity of large platforms of scale, they command strong valuations.  

Naithani: I would say that North America is relatively more consolidated than Europe in pure web hosting.  GoDaddy is by far the largest player, and there’s Endurance International’s bluehost, Web.com, United Internet’s 1&1, and other smaller players. The conditions that allow fragmentation in Europe really don’t exist here in terms of varying languages, regulations, etc. And while AWS, Azure and Google Cloud have web hosting offerings, they cater to a different customer segment and use case.

So what we’re seeing in North America is a trend toward these major providers making acquisitions that allow them to offer additional services. With hosting itself somewhat of a commodity service, companies are increasingly offering application hosting, infrastructure services and other value-added services. This meets the increasing demand among small businesses for these kinds of services. Again, as business in general becomes more tech-centric, many organizations are looking to use new web technologies without having to hire IT talent or become specialists themselves.

Q: What does the future look like in this space? How should market participants be adjusting their strategies?

Naithani: If I were looking to make an investment, I would focus on companies that provide those value-added services: application hosting, productivity, communication and collaboration tools, infrastructure services, cybersecurity—all the things that SMEs and sohos will want to have access to going forward. There will continue to be opportunities to build platforms that offer end-to-end solutions and go beyond basic hosting. 

I would also keep a close eye on Amazon, Microsoft and Google—with their resources and sheer scale, they will be formidable in any space in which they choose to compete. They could also be potential buyers of compelling businesses with differentiated expertise. The caveat to both points is that Amazon, Microsoft and Google, as well as GoDaddy, tend to prefer businesses that are high on the automation scale versus high-touch services.

Monjauze: I think Combell typifies many of the trends we’re going to continue to see in Europe. It has built an end-to-end, multi-country hosting business through a series of highly strategic acquisitions. Specifically, it has made over 20 acquisitions over the last few years, and now offers web hosting, domains, e-commerce and application solutions.

It has also capitalized on the synergies we talked about earlier: As one of the few platforms of scale in Europe, it enjoys healthy margins. I believe we’re going to continue to see such platform-building in Europe, as companies seek to expand beyond their boundaries, add differentiating offerings and enhance their performance.

See our latest Web Hosting and Managed Services Industry Update for more information, including public comparables, recent transactions and industry taxonomy.  

Published June 2019