GoDaddy: The pig in the IPO parade
Psst. How would you like to get in on an IPO of a company that built its brand name on controversial ads, is synonymous with sleazy customer practices, has an aging business model, and hasn't made a single dollar in profit in the past several years?
But wait. There's more. This hot company has an impossibly complex corporate structure. Much of the IPO's proceeds won't go to finance growth but to pay insiders tens of millions in loan payments, tax distributions and arcane fees - the same insiders who just received $350 million in dividends financed by a newly supersized loan.
Oh, and one more thing: Voting rights are controlled by insiders, so if you don't like any of this you can go pound sand.
If all this sounds good to you, you are going to love the GoDaddy IPO. If you're like any sensible investor, though, you may want to take a pass on this one. In a year that still promises to be a banner one for startups that will shape the Internet for a long time, GoDaddy may be remembered as the pig who snuck into the parade.
This is not the first time GoDaddy has tried to go public. In May 2006, after five straight years of losses, GoDaddy filed for an IPO to finance its future, before withdrawing three months later. GoDaddy cited the weak demand for IPOs, although 84 tech companies managed to go public that year. There were also reports that then-CEO Bob Parsons didn't like how the quiet period muted him from his radio program.
This time it's different. Parsons stepped down as CEO in 2011, after KKR, Silver Lake and Technology Crossover Ventures bought a controlling interest. (Parsons also stepped down as executive chairman of GoDaddy's board Monday, although he remains a board member with a 28.1 percent stake.) This time, the GoDaddy IPO is engineered to squeeze money from the company for all those insiders. Any new investors who buy in are just being cast as extras.
GoDaddy's outlook has also changed since the first attempted IPO. In 2006, the market for domain registrations had a bright future, with small businesses and individuals needing a registered domain name to hang their online shingle on. Today, that isn't the case. Many people and mom-and-pop businesses have abandoned their personal sites for de facto homepages on Facebook or Twitter, recognizing that attention has migrated to the mobile web, where URLs are becoming peripheral.
GoDaddy has compensated by pushing into Europe, Russia and India and by focusing its growth on web hosting and business applications. To do so, it's had to keep spending heavily on technology and marketing. Combined, those costs equaled a third of the company's revenue last year. But GoDaddy is spending to dominate a declining industry.
As a result, GoDaddy has racked up $688 million in operating losses since 2011. Its rivals, like Endurance International Group and Web.com, also have posted years of operating losses. The market for helping small businesses maintain a home online isn't one with growing profits – or, for the most part, any profits. It's one that's heading for a bloody period of consolidation.
What GoDaddy does have – an asset prized by any IPO candidate – is a well-known name, thanks largely to its blunt-force marketing tactics like costly Super Bowl ads that either make you guffaw or cringe, depending on your IQ. But the company is not without its controversies, notably in the litany of complaints that surface in Google searches on the company, featuring words like “unethical,” “sleazy,” “shady” or worse.
An IPO in a stagnant market with years of losses and a brand less shiny than, say, Twitter's, won't appeal to tech investors who have been choosy about their tech stocks lately. Even less appealing is that the IPO may not help GoDaddy do much to strengthen its position but will bring KKR, Silver Lake and Parsons quite the payday.
Earlier this month, GoDaddy paid a $350 million dividend to its current owners. To help finance that payout, the company took out a $1.1 billion loan. The move prompted Moody's Investors Service to change its outlook on the company to negative, citing “aggressive shareholder-friendly financial policies and its elevated financial leverage.” Moody's estimated the refinanced loan would add $20 million a year in interest payments.
Such payouts aren't unusual for companies controlled by private equity firms. But in GoDaddy's case, they were just getting started. Some $25 million of the anticipated $100 million offering will go to pay for “the termination of the transaction and monitoring fee agreement.” What is that? It sounds reasonable enough: the agreement paid KKR, Silver Lake and TCV fees to manage and advise GoDaddy. GoDaddy had been paying about $2.2 million a year in those fees. But terminating that agreement will, inexplicably, cost $25 million.
That's not all. The proceeds of the IPO may largely go to insiders, including the partial repayment of another loan the company took out from an entity controlled by Parsons. That loan has a credit-card-like interest rate of 9%. Then GoDaddy will have to pay all expenses related to the IPO from its proceeds. After that, the prospectus says, “any remaining proceeds” will go to the company.
Parsons and the other current owners not only control GoDaddy's board, they will also control shareholder voting rights. They've also restructured the company into a thing of Escher-like complexity: a partnership called Desert Newco that will actually include the operations of the domain-registration business. GoDaddy Inc will simply be a holding company.
The five-page section in GoDaddy's prospectus that explains the new structure is a masterpiece of opaque legalese. Try reading it to see how far you can make it before your brain turns completely numb. Why would GoDaddy's owners go to this trouble? Because the new structure appears to allow them another way to squeeze money from the company's operations. The partnership structure means GoDaddy won't have to pay US taxes, but its partners will. But those partners have chosen to make GoDaddy pay tax-receivable agreements, a form of financial engineering that lets private equity firms keep drawing cash from a company long after it's gone public.
In the fine print of the prospectus, GoDaddy warns that these tax payments will be “substantial,” that the cash necessary for them “will not be available for reinvestment in our business” and that they “will likely exceed” what the company would pay were it paying taxes like most public companies. What's more, GoDaddy must make these payments even if it has to take out a new loan to do so. And should GoDaddy run into certain problems – say, a bankruptcy – it must make all future tax payments in one lump sum.
This is a terrific deal for GoDaddy's current owners, less so for shareholders who join during or after the IPO. In the buyer-beware culture of the financial markets, there's not anything necessarily wrong with that. But unless the market tanks, investors looking for a good brand-name tech IPO won't have to wait long. As for GoDaddy, there is no shortage of reasons to pass on this IPO.
[Illustration by Brad Jonas for Pando]