NCC

Election -Taxes - Three-Card Monte - Auto Wrecks

joe — Sat, 27 Dec 2008 06:05:07 +0000

You are walking down Broadway and a gaggle of people are watching the magic. Everyone knows it’s a con, the mark knows it’s a con; the patter of the dealer is just too enticing. Watching someone get fleeced is like slowing down at an auto accident, you say to the passengers “Oh it’s a wreck, that’s why they are slowing down …I won’t slow down.”
Back in February I wrote a blog about selling your business, consider this a capital gains reminder. I was warning about the Bush tax cuts expiring and the affects it could have on your personal tax situation. It still applies, it is hard to deal with empirical facts. “Let me show you the Queen”.
Probably one of the most important speeches of a presidential candidate is the acceptance speech at a convention. Since this year both candidates had plenty of time to scratch it out, it should be factually correct. In one speech I heard, “I will eliminate capital gains taxes for the small businesses and the start-ups that will create the high-wage, high-tech jobs of tomorrow.” When I heard that line I shook my head, I think its still shaking. Yes I am still shaking my head. This is just too good to be true. “Follow the cards”.
I have looked at thousands of Internet, Telecom and Cable TV company financials statements and cannot remember any that paid capital gain tax. I was at a cocktail party the other night and discussed this with a man who had just retired after 30 years at the IRS, he concurred; he can’t remember seeing it either. It is rare. “See here is the Queen…Follow the cards”.
The IRS man and I agreed that if you go out of business, sell your company for stock, that you personally (not the company) can take long-term capital gains. But that would not apply to the aforementioned speech. After all, that speech talked about expansion not contraction. “See here is the Queen”, everyone knew where the Queen was. The dealer does a few more easy passes.
The Bush tax cuts expire in 2010, around the mid-term elections. So neither party could claim a tax increase when that happens. Government is great, you can raise money without raising rates; you just go back to the old rate. The cards are tossed a few more times. Sort of like the gas pump, those numbers are in there someplace.
Now the cards are dealt face down. So as this is an empirical M&A blog I would urge you to talk to your accountant if you are considering selling in the next two years. Thinking about it, if you are in a current sales process I would urge you to close prior to December 31st. Pick your card carefully. “Where is the Queen?”
All politics are like the Three-Card Monte, the mark never gets his change back.
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Fear - Reading Alpha Red

joe — Sat, 27 Dec 2008 06:05:06 +0000

If you have not heard it looks like Alpha Red is down, possibly out for the count, but apparantly not at this hour.
What we do know:
Washington State has filed anti-scareware suit against two businesses including Alpha Red. There are also complaints against Alpha Red's CEO James McCreary alleging violations of the Consumer Protection Act and/or Washington State's Computer Spyware Act.A few days ago it was announced that CWIE Holdings was purchasing Alpha Red.A few days later the word came out that the CWIE/Alpha Red deal was basically dead.Earlier this AM the Alpha Red web site was down, now it is up.The first CWIE release was about 9 days after the legal news. That is fast and probably intended to stop an eroding client base. The deal is dead notice was four days later.
I am reading fire sale, I am smelling fear.
The question is why or how did the deal tank. I have a few guesses; CWIE did some due-diligence, did not like something out there and pulled out. Deal points were disputed, probably price. James McCreary decided the sale was a kneejerk reaction and that he was selling way too cheap, and lastly although CWIE was purchasing assets, then decided they did not want to get close to those assets. All of these have one thing in common, money…almost all deals, especially announced deals, fall apart because of a money factor.
Fear by the way is not a bad thing. My gut is that CWIE walked away. Probably for a good reason.
Owners of dedicated hosting firms have told me they are getting numerous calls from Alpha Red customers that are jumping ship. Some if not many Alpha Red customers are concerned about accessing or losing data (Which may or may not be actually true).
Lets admit it, for the customer this in an odd situation. The type of error that will not readily replicate itself. But lets think of the long term, something I will attack in my next blog.
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Doing a deal at a Fire Sale Read My Alpha Red

joe — Sat, 27 Dec 2008 06:05:06 +0000

As mentioned in my previous Blog “Fear – Reading Alpha Red” I think we were dealing with a fire sale.
What is a fire sale? Generally you know it before you get there.
Doing a deal at a fire sale. It’s the end of the day at your garage sale; your mother’s 1970 Nordic track is the last large item. Throughout the day you marked it down from thirty, turning away low-ball offers, to four bucks. The last customer of the day offers you fifty cents and is walking to the car.
Three - At a fire sale there are three objectives. The buyer needs security. The seller has two needs, something to cut their losses and the ability to save face.
Two – There are two problems with a fire sale - Time and Ego
Seller time: Earlier in the sale the seller believes the assets are worth much more than reality. As time goes on the price drops, fear is setting in. Time is the seller’s worst enemy. (Side note: In many deals the first offer is the best, in a fire sale take heed.)
Buyer time: As time goes on and a buyer has been looking at the deal too long, it just does not look as good as last week, fear is setting in. They want security.
Ego: The seller wants to look good somehow, which often adds time, drops the value and screws up the deal. Get over it as soon as possible. Seller – No one ever wants to do a bad deal.
One – There is one answer, security. A deal has to be struck that provides ultimate security for the buyer; the deal has to be done as soon as possible. You are probably looking at pretty stringent seller reps and warranties.
Zero - The next part of the deal is the hardest for a seller to take; in all probability the seller is going to get little up front. The deal needs to be structured around conversion and retention; this is the only way the buyer can obtain security. If you start with this assumption, save time, assist with the transfer of customers, more will stick. By saving time, not doing the deal at the edge of a precipice you will be closer to the market value of the customers.
Security is also to the seller’s advantage, but often they cannot see it.
Zorro - So when the noose is tightening around your neck, look for Zorro, you may live to fight another battle.
Oh, Alfa Red — the nine odd days between the announcement of the lawsuit and the announcement of the deal was probably an eternity.
I prefer being Zorro.
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You can only go analog on Mars - Hosting Industry Sky Rockets

joe — Sat, 27 Dec 2008 06:05:06 +0000

“Waaas Happn?” “Yougotit” – I was working up in Harlem in the seventies. I was often taken for a cop. It was a happening place, dangerous. I was in my cream leisure suit.
If you have seen this new TV show “Life on Mars” you will note the hero is hit by a car, in 2008, and wakes up in 1973. He is a cop in both realities.
The show is a study of the analog vs. digital world.
A few weeks ago I was at the Hosting Transformation Summit, one of the major points was that data center demand would be growing faster than capacity. The demand spread would catch-up was 4-5 years. That denotes a strong sector.
Our economy: As firms trim unprofitable offices, lay off employees; streamline operations they will make other changes. They will add SAS services that match the solution to the headcount. They will add servers to take up the marketing and customer service void left behind by that closed office. They will add GPS and communication solutions trying to emulate UPS as they deliver more and more Amazon packages. All of this will further hosting growth.
Yes we could go back to doing budgets in long hand on accounting ledger paper. Running all your credit card sales by hand, bundling with rubber bands then sending Betty to the post office. But you live in the digital not vinyl world.
The overall market is looking where to go. P&G has always been good in a down market; maybe I will go there. Most investors however prefer some growth in addition to safe investmnts. I like hosting growth.
It is going to take months for the overall market to find what you already know. They are confused. This is a small sector, hiding in the corner of the economy. This is a small blog, sending a flare up in the night. After some of this dust clears they will see the positives and wish they had seen that light.
So Wall Street, if you are looking for growth, price stability, recurring dependable revenue stream, consolidation potential and sustained profitability, look no farther. Hosting controls the digital world.
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Data Centers All in the definition. Millions of SQ FT Available

joe — Sat, 27 Dec 2008 06:05:06 +0000

If anyone is looking for a couple million square feet of new data center space, I’m your guy.
A couple of weeks back I wrote a Blog entitled Managed Hosting and Colocation in 2009 and Beyond. My basic thesis was based on these factors: (1)- There is a widening gap between required additional space today and the shortfall of new data space being built and (2) The real estate debacle will move a lot of banks (the ones that are left) to the sidelines as they cannot see the trees from the woods in order to fund your data center expansions.
As luck would have it, that blog got a fair amount of play in the national commercial real-estate community. As such RE professionals have come to my assistance with some, in what they consider, are excellent data centers. Just two examples:
Kansas – 135,000 sq ft – Excellent Parking – Cable TV and telephone service available. 100,000 sq ft of contiguous concrete floor with 30-foot ceilings, excellent for warehouse or data space. Building insulated. Immediately available.
Georgia – 60,000 sq. ft. – Can be divided into 10 strip mall units each with its own HAVC and electric meter.
This real estate trend also occurred about 8 years ago. All commercial property that could not be sold became data centers.
As there are a lot of properties available, the bright side is that certain ones may actually be candidates for an eventual data-center, at a good base price.
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Managed Hosting and Colocation in 2009 and Beyond

joe — Sat, 27 Dec 2008 06:05:05 +0000

From the Hosting Summit - Dan Golding packed a lot of future in this presentation. However the one point most people keyed on was the growth of the Data Center and managed hosting industry.
Get this there is a 15% growth demand, and we are talking worldwide, but there is only a 5% supply ramp-up and this is probably through 2012
I think some clarification is in order. This become a real-estate capital tanking problem, yes some explanation.
First 15% demand. This year, next year and several years forward we need 15% more servers, or sq./ft, or power capacity (he thinks this is a trend) than we did last year. Compounding makes this interesting.
Supply ramp up 5%. That means we are building only 5% of our needs be it servers, sq/ft or power capacity.
As we are falling short in some ways – there is a tremendous upside for growth.
Real-estate Capital tanking – You may have noticed the Lehman Bros largest bankruptcy in the US history. Bankers are strange, now all real estate is bad.
Google screwed it up. They build that 500k-sq/ft data center here and there bankers think there is an oversupply.
Obviously someone needs to increase the supply – how about you?
Bottom line – good times could be ahead if you can convince the banker.
Side note: This is just a small snippet of the presentation.
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Archimedes Principle - Money For Your Data Center

joe — Sat, 27 Dec 2008 06:05:05 +0000

Legend says that Archimedes discovered the principle of displacement while stepping into a full bath. He realized that the water that ran over equaled in volume the submerged part of his body.
Follow the money.
Or when Baby Face Nelson was asked; Why do you rob banks??
Enough about money, where does it go?
Ask Archimedes; currently it is flowing out of the US.
One foot in the water: $400+++billion a year going out of the US to oil-producing countries. Some goes to stellar international figures like Venezuela President Hugo Chavez. Canada gets 20% - time to visit Terrance and Philip.
Put that other leg in the bath: You know our little bank problem. Now we don't know the outcome of that $700 b (Hey that's pushing a trillion, real money.) But we know that China will be a big buyer of that debt.
Who, when or how did that robbery happen? Where is Nelson when we need him? It was so clear then.
So if you are building your data center, growing your business through acquisition, you may want to look to Europe until this boils over.
Banks are in business to loan money. European banks know this and generally have longer horizons. It will take a while before US banks figure that out again. (As a side note those short-term horizons and quarterly judgement days were a contributing factor.)
The one thing I am convinced from last weeks Hosting Summit, is that the data center and hosting sectors are fundamentally good, if not excellent.
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The Market Dropped - Plummeted - Tanked - Skidded - Those Hosting Stocks

joe — Sat, 27 Dec 2008 06:05:05 +0000

The Dow lost 777 points yesterday. Sounds like a game…we lost points. Yes a 10% drop (Note – On "Black Monday", October 19, 1987, the Dow fell 22.61%).Yes today there was a loss of $1.2 trillion.I always ask the question on days like this…”Where did that money go?” OK how did the hosting industry fare. * Level 3 -16.00% * Limelight -14.50% * Internap -13.90% * Digital Realty Trust -13.60% * Equinix -10.60% * Savvis -10.20% * NaviSite -8.30% * Terremark -5.90% * Rackspace -3.70%Yes a bit of a slide.In Europe most exchanges dropped 3-5%. That was in the anticipation of the $770 billion bailout. In contrast the TOKYO Nikkei Stock Average fell 1.3%. – Tokyo trading ended well after the bailout vote collapsed. This could be a theme.I doubt if the foreign markets see this as wise. They origionally thought our government was acting rashly, tryng to spend $770 billion overnight. Now they know our legislatures have been working on this for 5 days, they have acted prudently. They have scaled it down to about $150 billion a day. Isn’t it time for a coffee break?In my last Blog I suggested that hosting companies look to Europe as a financing source. A reminder that the Concorde is no longer in service.Most of this was witten overnight - but as of this writing the Dow is up 200 points.
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Rackspace WAS SET UP — A study in motivation

joe — Sat, 27 Dec 2008 06:05:04 +0000

Rackspace began trading 11 days ago as of this writing …my analysis.
At HostingCon, during one of the panels the speaker brought up the Rackspace IPO, he bet the strike price would be $14 – sounds good to me – Another panel member piped in confidently “I bet it’s $12” – sounds good to me.
We all enjoy the water cooler, on stage you have to say something memorable. Now we know that Rackspace is trading around $10 - about a 20% drop from the IPO day. The sky is falling. Regardless of the first few baby steps Rackspace is still a good company, still good price and was a good deal. Unless you actually bought at the IPO price (sorry by the way) you don’t care.
One of my clients called, he had reviewed the Rackspace IPO. He told me that Rackspace sold for 4plus X 2007 revenues; this is a valuation – sounds good to me.
Actually my client fully recognizes the Rackspace value does not apply to his company. Even though the product lines are almost identical, how do you compare a $6 million firm with Rackspace at $500 million? Don’t spend too much time doing this exercise.
One of the articles I reviewed for this in-depth analysis wondered why Rackspace went public in this down market. It stated Rackspace has some great investors like Norwest Venture Partners and Sequoia Capital suggesting they should have advised otherwise – I guess they let Rackspace down.
That’s not the venture capital groups’ job. Their job is to take risk and obtain reward. The Investors cashed out, nothing wrong with that. You can’t stay in forever. They took a bet on Rackspace management and vice-versa.
Should not the underwriters (Goldman, Sachs, Credit Suisse et al) advised Rackspace management to hold off the IPO in this down market? Ethics battle – Aristotle vs. Kierkegaard
I can see the meeting now…"…markets off a bit – of yes Rackspace, should we consider moving back…"
Did you know that most of the underwriter’s fees come from pushing that $400 million in stock out the back door?
This is now history. All motivations have subsided. It was a good deal as all parties, including the new shareholders who got what they bargained for.
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Hosting Transformation Summit - Let There Be Light

joe — Sat, 27 Dec 2008 06:05:04 +0000

For you that are not familiar with the Hosting Transformation Summit it is a two-day seminar that includes “keynotes”, very professional and timely presentations to assist the industry move ahead, all interspersed with breakfast, coffee breaks, lunch and networking receptions.
That being said it should live up to its reputation. If your goal is to see the direction of the industry, you should be here. The right people are here and you will be doing some business.
Case in point - the event starts off with a Keynote presented by Dan Golding of Tier 1 Research entitled “Managed Hosting and Colocation in 2009 and Beyond”.
If you are attending you could meet some 500 attendees. There is a small exhibit hall, but that is not the main event.
I am attending and will provide a few insights.

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