Web.com Buys Register.com for $135 Million

Web.com (WWWW), which provides online marketing services to small businesses, has been an active buyer over the years. Until now the deals have been mostly small. Thursday, however, the company made a transformative acquisition: the $135 million purchase of Register.com, a provider of Web domain name registration services.

Web.com's market cap is only $101 million, which puts into perspective the size of the deal. However, the company generates strong cash flows and was able to secure financing for the transaction. This involves a $110 million term loan and a $125 million credit facility from Royal Bank of Canada and Wells Fargo Bank.

A Strong Business in the Small Business Market

Founded in 1994, Register.com has built a strong business in the small business market. While the company has been primarily focused on domain name services, it has also moved into other related categories, such as email, security, e-commerce and website creation. These services now account for roughly 40% of revenues.

But with the recession and restrictive debt covenants, it has been challenging for Register.com to grow. Thus, a deal with Web.com should help provide more capital resources. As a combined entity, the revenue run-rate will be $180 million and there will be over one million paying customers. For 2010, adjusted EBITDA is expected to be over $36 million.

It certainly helps that there will be a variety of cost savings and revenue synergies. What's more, Web.com and Register.com have been partners for about ten years, which should allow for a fairly smooth integration process.

Overcoming Market Shortcomings

According to Web.com, the market opportunity for small business online services is about $10 billion. Yet, there are problems. First of all, it can be tough to cost-effectively acquire customers. Next, the recession has taken a toll. Also, because of competitive forces, the churn rate is often high.

These factors have definitely impacted Web.com. In the latest quarter, net subscriber count increased only by 3,600 to more than 278,000 and churn came to 3.1%. Revenue dropped from $27.6 million to $25.1 million and cash flows were $1.8 million, down from $5.7 million in the same period a year ago.

So while a deal for Register.com will increase scale and EBITDA, it will still be difficult to get traction with top-line growth. Rather, this will require the comeback of the small business market, which continues to lag and could take a year or more to get back on track.