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CEO Joel Kocher's game plan is to grow Interland from a company doing $60.7 million in sales into a giant within the Web-hosting business.

Om Malik correspondent HostingTech | omalik@hostingtech.com

Growth through acquisition is a strategy many have tried before. ITT Industries has become a poster-child for the strategy, as has Citigroup, which now straddles the world of international finance. In the technology business, there are also instances of this strategy, although success has been limited. Lucent Technologies and Nortel Networks are two technology companies with a mixed record of growth through acquisition. Others have been downright failures.

Joel Kocher, the chief executive officer of Interland (www.interland.com), an Atlanta-based Web-hosting company, remains undeterred and takes his cue from Cisco Systems, which has been reasonably successful at buying and growing revenues. Unlike Cisco, however, Kocher wants to buy customers, not companies.

Buying customers
Kocher's latest acquisition is AT&T's small business hosting customer base, which Interland has purchased for somewhere between $4 million and $12 million. Interland is reticent about providing the exact cost per customer, but says that it is far cheaper than the $500+ it costs to acquire a new customer through marketing efforts. (See acquisition sidebar,).

Kocher's ambition is to turn Interland into the single largest Web-hosting company serving small to medium-size enterprises (SME), the bread and butter of the datacenter business. The SME market accounts for 60 percent of the total hosting business and is estimated to be a $16.2 billion industry by 2003.

Unfortunately, history goes against him.

Verio, the last company to attempt growth by buying rivals, ran into a virtual brick wall after it bought nearly 50 competitors and scrambled to manage disparate technologies and corporate cultures. Having learned its lesson, the company has virtually abandoned the market space to focus on the bigger accounts. What makes Kocher think he will succeed where others have failed?

"We are out shopping for customers and very selectively buy assets," he says. "Our management team understands that winners are right now being decided and we are number two, behind Verio."

By buying customers and transitioning them to Interland's easy-to-manage technology platform, Kocher says they can lower the costs and, at the same time, parlay these accounts into value-added services.

His approach has some supporters. Andrew Schroepfer, the president and founder of Plymouth, Minnesota-based Tier 1 Research (www.tier1research.com) says, "The combination of innovation with cash is interesting and makes sense. Although there are a lot of market opportunities, there are a lot of duds as well."

Even though Schroepfer feels Interland is being careful not to make mistakes, there is a chance it could turn into more risk than reward. Stephen Murphy, the lone analyst who follows the company for CIBC World Markets, a New York-based brokerage (www.cibcwm.com), concurs.

"They have proved to be disciplined and can integrate the acquisitions they make quite well," says Murphy, who points out that one of the distinguishing aspects of Interland's strategy is that it is not a traditional roll-up strategy. "They have a strong cash position and they know that these assets are not going to be around [indefinitely]."

In the beginning
Interland was formed as a result of a merger between Micron Electronics' HostPro and Interland in August, with the new company retaining the Interland name. Kocher, who became head of the new Interland, moved his headquarters to Atlanta. At the time, Interland had 138 million shares outstanding and a market value of $140 million. The combined company had a cash balance in excess of $200 million, net of all debt.

Call it a lucky break - the HostPro-Interland merger happened just as the whole Web-hosting market started to collapse. All companies, from the little guys to giants like Exodus, were running for Chapter 11 protections. Some were being simply shut down. For Kocher, it was time to go shopping, and with nearly $200 million in his coffers, he could pick and choose.

"We knew we had the cash, and, at this time, cash is king," boasts Kocher. "Clearly, consolidation of the Web-hosting industry and financial market conditions have created an opportunity for a strong, well capitalized player. By adding new customers and revenue without acquiring additional assets, we are significantly improving our operating efficiencies."

It appears Kocher has made the right call.

The company has proved to be one of the few that has managed to grow revenues in an industry that is clearly at a standstill. The company's revenues for the most recent quarter came in at $24.9 million, ahead of the company's own expectations. For fiscal 2001 (which ended August 31), the revenues doubled to $60.7 million, from $32.8 million one year earlier. The target for fiscal 2002 is between $105 million and $115 million in revenues. Interland's cash position remains one of the strongest in the industry, according to Interland Chief Financial Officer David Buckel. As of Nov. 30, 2001, Interland had nearly $170 million in cash and investments.

Leading the way
If imitation is the most sincere form of flattery, then Kocher should be flattered. Divine has also embarked upon the same strategy (see page 52), and others are also making plans to follow the absorb-and-conquer game plan.

"Our intention is to rapidly integrate these customers into our existing operations, using our proven integration expertise," says Kocher. "Interland understands the unique needs of small business, and we welcome our newest customers and look forward to providing the high-quality business-class Web-hosting products and services that help grow their business.

Ironically, if you had asked Kocher about Web hosting 10 years ago, you would have received a blank stare. Known for his quick wit and marketing acumen, Kocher was Michael Dell's right-hand man in the early 1990s. He later hooked up with Power Computing's sales team and ultimately joined Micron PC in 1998. A year later, it became clear that the PC was a dying, low-margin business. Before you could spell DNS, Micron dumped its PC division and moved into the Web-hosting business, later acquiring HostPro.

Kocher's not-so-secret weapon is the datacenter manageability software platform, which allows the company to get new customers up and running almost instantaneously. And if one customer leaves, the software can easily re-deploy those assets for a new customer. As a result, Interland needs less datacenter space than its competitors, which keeps its costs low. Several companies, such as Ensim, are selling this software to other vendors now, but Interland has an edge over its rivals.

One of two things
Kocher believes the world of Web hosting is going to split into two product categories. Large enterprise accounts will be taken care of by telecom companies, IBM, EDS, and other equally large consultants. The other market category will be the low-margin, high-volume SME niche. The latter is the market Interland would like to dominate.

"I think Joel is a very strong marketing guy and there is no doubt that he knows how to sell to a small business customer," says Murphy of CIBC World Markets. "I think SME is where people underestimated the demand and the customer acquisition costs. There were not too many people who were equipped to build big companies, as this was an industry that had imprudent growth strategies. However, he is more equipped to do that, and they have all the pieces in place to be profitable in the next four quarters."

As Kocher points out, most of his customers (300,000 websites for 180,000 customers) are hosting only their websites with his company right now, but when they start using e-commerce and other hosted applications, the model will become even more compelling. His target is 1 million websites.

As Kocher says, "We want to be the AOL of the Web-hosting market. ... I don't think of the company as a tech-hosting company - we are in the customer service business."

As long as he remembers that, he just might become the John Chambers (Cisco's president and chief executive officer) of the web-hosting business.

String of pearls

Interland acquires CommuniTech.net, yet another small host

Kevin Self Associate Editor | kself@hostingtech.com

As the hosting industry continues to consolidate, Interland is emerging from the pack as one of the leaders. In February, CommuniTech.net became the third company in four months to be added to the string of hosting pearls Interland seems to be collecting.

The acquisition of CommuniTech.net will add the pages of 20,000 small business customers to the 300,000 paid websites already hosted by Interland. No financial details of the transaction have been disclosed.

"CommuniTech.net's customer base is very similar to Interland's. Like our other acquisitions, adding CommuniTech.net's customers to the Interland fold brings us greater scale that will drive profitability," says Joel Kocher, the chief executive officer for Interland. "This acquisition, however, differs from others we have made in recent months; we acquired not just the accounts but the entire company. CommuniTech.net was appealing because of its people and technology. It was already a well run, efficient and profitable hosting business - a rarity in our industry."

Interland liked the company's efficiency and management style so much it snagged the founder and president of CommuniTech, Gabriel Murphy, as a member of the Interland management team. So what is in store for the growing host? Kocher was understandably vague with details, but made his intentions perfectly clear.

"Current market and industry conditions have created an opportunity, and because of our strong cash position, Interland is in a position to seize the opportunity. We intend to be the consolidator in this consolidating market."

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