High fliers make a mark in domain names

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I am jealous. Not of the usual suspects. I am fine with all the 30-something hedge fund managers making $20m bonuses. I have dealt with the fact that there are managing directors at the big investment banks who earn $10m a year. That is fine. I don’t want to work at an investment bank. Lloyd Blankfein at Goldman Sachs did not respond to my e-mails six years ago anyway.

I am jealous of the people who registered names such as sex.com, vodka.com and business.com. Sex.com sold for $12m last year to a private equity group. Vodka.com sold for $2m, business.com for $7.5m in 1999. The list goes on. Last week antispyware.com sold for $550,000. And this past year, the misspelled mortage.com garnered $242,000. They were smart people who registered these names.

We all knew, back in the early 1990s, that the internet was going to be big. But few had the business sense to make a land grab on domain names. It was even free to register then.

Cover this paper for a second and try to guess the first “.com” registered. Your hunch might be ibm.com or microsoft.com but that is not the case. The first was symbolics.com. Symbolics, Inc was a spin-out of MIT that made “Lisp machines”. Do you use a Lisp machine?

It is natural that the domain name business would intersect with the hedge fund world. I called Jeff Burkey who runs hedgefunddomain.net. He sells domains for hedge funds. Say you were an amateur pilot paying your dues at Goldman Sachs and now you’re ready to start your own hedge fund. You had your heart set on Aviator Capital but aviatorcapital.com is already taken. Don’t sweat it. Burkey owns it. And he has it for sale for $10,000.

That is nothing if you’re launching a $700m hedge fund. He has great names for sale, including maximacapital.com and lucentcapital.com, each for $10,000. “The theory is similar to a deep out of the money option strategy,” he said. “Since I buy all the domains directly from the registrar, my cost is very low, less than $10 per year,” Burkey said. “I buy most knowing full well they will expire worthless. I only need a few to hit for a solid ROI.”

The idea was born when he tried to register a domain name, terrapincapital.com. “It was taken so I registered two derivatives, diamondbackcapital.com and testudocapital.com.”

A few months later Chad Loweth and others started a $500m fund and happened to name it Diamondback Capital. “So I learnt a little HTML and hedgefunddomain.net went live. It’s been a lot of fun.”

When I spoke to Burkey, vodka.com had just been sold for $3m and he’d been trying to register whiskey.com, sherry.com and others. Of course, they were all taken.

It turned out that Bob Chapman, a hedge fund manager and shareholder activist, owned sherry.com. I rang Bob and asked when he started buying domain names.

“In March 1996, it was obvious to me that .com versus .net etc was beachfront real estate available for lease at $35 a year. A true no-brainer,” he said. Had he received offers for any of the domain names he owns? “Yes,” he said, “but they were not bought with an intent to sell for a profit, instead to use them. Several telco service operators have offered me over $3m for calls.com – to compete against Skype – but I am holding out for a much higher price. Given that all calls are going to be made over the internet in the next 10 years, calls.com is the hotels.com of that space.”

Several public companies are in the domain name business and I think most of them are interesting buys. It is worth taking a look at a pseudo-domain name index.

First, there is Marchex (MCHX), started by Russ Horowitz, former Go2Net founder and chief executive. The company owns more than 200,000 names, including domains for every zip code. Marchex trades for a tad over 10 times cash flows and had year-over-year revenue growth of 26 per cent last quarter.

Communicate.com (CMNN.ob, which trades over the counter) is a small public company that is sitting on quite a few domain names, including importers.com, perfume.com, body.com and cricket.com. The company has been generating revenue by selling domain names but, more recently, by setting up e-commerce sites on some of these domains and making decent money from retail.

InterSearch Group (IGM) on the Amex owns valuable domains such as irs.com. TuCows, another Amex-listed company, helps connect buyers and sellers of domain names and takes fees in the middle. TuCows is currently the fourth largest domain name registrar.

Private company GoDaddy is in first place. GoDaddy is a veritable cash machine but pulled its S1 filing because it didn’t like how GAAP forced it to defer, sometimes for years, cash revenues the company already had in the bank. “There’s no need for us to go public,” Bob Parsons, chief executive, said at the time.

The grandaddy of the domain name business is Verisign, which is the provider of all the .com and .net domain names. All of the registrars are simply reselling domain names they acquire through Verisign. VRSN has a clean balance sheet with $500m in net cash and trades for a little over 10 times cash flows.

This will be the year we finally forget about the dotcom bust. There are many private internet companies ready to go public. Just look at Zappos, the online shoe company, which is enormously profitable. And the venture capitalists are itching to exit some trades and put money to work in others.

The land grab for domain names is far from over, both in the hedge fund world and the real world, and I think the companies mentioned here are worth a look.

james@formulacapital.com

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