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The Sale of .ORG Registry: Continuing the Conversation We Should Be Having

On 11 February, I participated in a discussion about the pending sale of PIR at American University Washington College of Law, appropriately titled, The Controversial Sale of the .ORG Registry: The Conversation We Should Be Having. It was great to have a balanced discussion, free of some of the emotions that have often made it hard to discern the realities of the transaction. Certain misapprehensions arose in the discussion that we lacked the time to explore fully, so I want to take those up here.

Misapprehension #1: PIR is being sold for the wrong price

Some are suggesting that the $1.135 billion price for PIR is too low. One version of this argument compares the number of domains under management by PIR to those of VeriSign, and then draws conclusions about PIR's putative value based on VeriSign's market capitalization. The math may be right as far as it goes, but it's misapplied.

It is important to note that, because it operates its own registry back end, VeriSign is in a line of business that PIR is not. One would expect, then, some differences between the valuation of PIR and the valuation of VeriSign.

The valuation of PIR in this transaction is roughly 27 times EBIDTA, a ratio reflecting one standard way of evaluating company valuations. According to public reports, VeriSign's Enterprise Value/EBIDTA is 28.66, which suggests that the value of PIR in this proposed transaction is approximately correct.

Others claim that the Internet Society will not get too little for PIR, but too much. They claim PIR will need to gut services, underspend on technical infrastructure, and increase prices by large amounts to ensure a return.

Those in the best position to know about ongoing business expenses — PIR and its back-end service provider, Afilias — have stated clearly that such service and infrastructure cuts are not contemplated. PIR will remain the operator of .ORG and its contracts will continue. Since PIR will no longer deliver a significant part of its revenue to the Internet Society, that revenue will now be available for investment in the business as well as to provide a return on investment. So, there is no reason to suppose that the sale price is too high.

Misapprehension #2: This is a dangerous leveraged buyout with lots of debt

People hear a private equity firm is involved and suppose this case will necessarily resemble other celebrated cases where a private equity firm acquired a company with a lot of debt and bankrupted the acquired company. I understand this concern; however, not all private equity works that way, and this particular transaction does not have a lot of debt. There is a loan of a little over $300 million involved. Although that sounds like a lot, in a transaction worth more than $1 billion, it is not. This is not a "leveraged buyout” where 90% of the payment is borrowed money.

Misapprehension #3: A public auction should have been held

It seems intuitive that the surest way to get the best price for a business is to put it up for sale, advertise it, and run an auction among prospective bidders. This idea, while seemingly appealing, turns out to be bad from a business perspective. The problem is what happens while the "for sale" sign hangs on the door.

In such cases, the very announcement causes uncertainty; some employees seek other jobs. Meanwhile, the distraction consumes the employees who remain, devaluing the very asset being sold.

The Internet Society's Trustees and PIR's Directors appropriately consulted with both financial and legal advisors. A wide ranging public auction would have been bad for PIR and .ORG. Multiple suitors, however, submitted bids that were evaluated. In addition, the Boards of both the Internet Society and PIR obtained and relied upon a valuation report provided by an independent firm to ensure that the transaction was no less than fair market value.

The risk of depressing PIR's value is also why it would have been unacceptable for the Internet Society and PIR to consult widely about the sale: it would have done damage to PIR, which the Trustees and Directors could not do. Cases like this are why the Internet Society has Trustees, and PIR has Directors, who are selected the way they are. Without being "community representatives" per se, they bring to their position the perspective from the community that selected them. And they make prudent decisions for the organization.

Misapprehension #4: Considerations from 2002 override everything

Some of those concerned about the pending transaction focus only on an event of nearly two decades ago. The 2002-3 reassignment of .ORG, however, was a complete redelegation: In current ICANN-speak it would be a change of direct control. In today's proposed transaction, PIR will remain the registry operator with the same contracts and provider. So it's inaccurate to call this "the sale of .ORG."

Second, many of the conditions from 2002 no longer apply: The Internet has changed. People used to see domain names a lot when using the Internet, especially in the address bar of a web browser. On modern mobile devices and tablets, nobody types a domain name. When .ORG was reassigned, the iPhone was still 5 years in the future. Moreover, in 2002 there were only a few gTLDs. Many new TLDs started operating more recently, and now .ORG has thousands of competitors.

These realities mean that things have changed for PIR and .ORG. It's not some fatal change, but as ISOC Trustee Mike Godwin has stated, the status quo is not the best way to ensure .ORG thrives for the long term.

Taking all these factors into account and exercising the sober duty of Trustees, the Internet Society and PIR Boards made a big decision, ensured PIR was priced appropriately, prevented loss of value, and performed extensive due diligence activities to protect the Internet and .ORG. In the process, we did what I am sure is best for the prosperity of the Internet and the .ORG registry, enabling these priceless resources for tremendous good to get even better.

All parties involved in the transaction are committed to the conversation we should be having — one where facts prevail. For more information about the sale, follow www.keypointsabout.org.

By Andrew Sullivan, President and CEO, Internet Society (as of Sept 1, 2018)

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