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Interland Finishes Holiday Shopping, Buys Hostcentric

Interland Inc. , a Web hosting service provider that focuses small and medium businesses (SMB), continued its long-year buying spree yesterday, announcing its plans to acquire fellow hosting provider Hostcentric for $25.8 million in cash and stock.

Interland's CEO Joel Kocher said in a conference call yesterday that the purchase of Hostcentric, along with last week's acquisition of Web services independent software vendor (ISV) Trellix, should "remove any doubt of who the leader in this market is."

In return for all the outstanding shares of the privately held Hostcentric, shareholders will receive $3 million in cash and approximately 13.5 million shares of Interland stock, the Atlanta-based company reports. The transaction will require the approval of a majority of Hostcentric's shareholders and is expected to close by March 2003, according to the company.

"Our scale and integration expertise will enable us to rapidly reap the full financial benefits of this transaction, ensuring a good return on investment for our shareholders," said Kocher.

Kocher said that he expects the integration with Hostcentric to be completed this summer and the transaction will result in more than $4 million of additional cash flow.

Interland's drive to grow its SMB market share through acquisition began last fall when it bought the retail hosting business of Interliant (see Interliant Sheds, Interland Grows). The strategy continued to unfold when Interland announced in January that it was buying the small business Web hosting division of AT&T (see AT&T Sells Off Small Biz Hosting Accounts) and continued with deals to buy to CommuniTech.Net and Dialtone Internet.

Kocher said that the company's strategy will now switch from a growth-through-acquisition approach — designed to allow the company to quickly achieve economy of scale — to an integration strategy.

However, Kocher noted that should another deal similar to Hostcentric come along, Interland won't keep the checkbook closed. "There are not many companies like Hostcentric left out there," Kocher said. "It's a deal we have been working on some time. If anything of that size become available, we'll do it."

The acquisition of Hostcentric will result in the addition of tens of thousands of shared Web sites, hundreds of dedicated servers and over 1,000 reseller channel partners, according to Interland.

While yesterday's purchase of Hostcentric will quickly add revenue, last week's acquisition of Concord, Mass.-based Trellix is designed to allow the company to implement the organic growth phrase of its strategy.

Interland cites research from The Yankee Group that estimates there are 20 million small businesses and home offices in the United States and that most don't have an effective Web presence — that market will represent $4 billion in e-commerce revenue by 2006.

Trellix, which was founded in 1995 by VisiCalc creator and software pioneer Dan Bricklin, provides private-label Web site building, promotion and marketing tools aimed at small businesses. It also offers 56 vertical-market templates designed for industries such as day care, fitness and beauty, real estate and others. Trellix claims that more than four million Web sites have been built on its platform.

"One of the things I love about the Trellix acquisition is it begins to paint Interland in different way. It really becomes more a solutions-oriented company as opposed to just a service provider," Kocher said during the conference call. "Trellix has a entire suite of products we can sell into our customer based let alone to the unwashed masses."

According to Interland, the transaction consists of $9.75 million in cash and stock plus warrants. Under terms of the agreement, in return for all the outstanding shares of the company, Trellix shareholders will receive $4.75 million in cash, three million shares of Interland stock and a five-year option to purchase up to six million additional shares of Interland at $5 per share. Interland reports that the transaction is expected to close within 30 days.

"Trellix will be a slight drag on EBITA (earnings before interest, taxes and amortization), but our plan is to redefine our go-to-market approach and step on the accelerator in fiscal year '04," Kocher said.

As for the specifics of the integration and its affect on the employees of the companies, Interland told analysts and the press that Interland's current headcount is 711 and that Hostcentric and Trellix employ 130 and 47 people, respectively. The final headcount will determined as integration plans move forward.

With Hostcentric providing an immediate positive impact to the bottom line and Trellix providing the foundation for future organic growth, Interland appears ready to roll in 2003. "Once we gain closure of excess facilities and we integrate acquired businesses into one homogeneous, centralized, standardized platform, we believe this company's results are dramatically different," Kocher said.

With the word integration now Interland's mantra, the acquisition spree appears to be over. Of course, there are still four shopping days left until Christmas.


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