2. Cheval Capital, Inc.
• Washington DC based boutique investment
bank
• Focused on Internet/Hosting Services M&A –
360+ transactions since 1996
• Clients have ranged from the large (Rackspace,
Web.Com, Endurance) to the very small
• FINRA, SIPC member
3. Agenda
• Pre-Transaction Questions
– Why buy
– Acquisition Structures
– Where to buy
• Valuation & Prices
• Process
• Common issues and suggestions
4. Why Buy?
• Scale – Be bigger for better economics &
competitive position
• Growth – More economical way to grow than
marketing
• Build vs Buy – Faster/cheaper/better way to;
– Add a new product vs developing it yourself
– Enter a new market
• Adding talent
5. Acquisition Structures
• Consolidating
– Buyer moves seller’s customers & business onto buyer’s
infrastructure
– Deal structure, pricing & diligence focused on customers
and migration
– Returns are largely driven by cash flow margin pickup
• Platform
– Buyer retains seller’s business largely as is
– Deal structure, pricing & diligence focused on entire
business, firms working together & retaining key people
– Returns are largely driven by future CF growth
6. Where to Buy
• Local
– Best economics, no cultural issues, most knowledge,
fewest choices, hard feelings
• Across Europe
– Lots of great companies, more choices, few buyers
– Convincing people to sell can be difficult, there can be
meaningful cultural / geographic / legal issues
• US & Canada
– Robust transaction market for almost all sizes and types
of hosters
– Few, if any, geographic or cultural issues within N.A.
– Some legal & banking differences between US / Canada
– Can be more competitive
7. Private Market Prices - Frank
• Small businesses: 3 to 5x Seller’s EBITDA
– 1.0 to 1.5x turnover at 30% EBITDA margin
– Premium for top brands in a market
– Premiums for growth and customer base stability
• Larger businesses: 6 to 8x Seller’s EBITDA
– Premium for top brands in a market
– Premiums for growth and customer base stability
– Premiums for lower risk
European premiums for top brands can be significant
8. Private Market Prices - Today
• Smaller Hosting – 3-5x EBITDA; 1.0-1.5x Revenue
Larger Hosting – 5-10x EBITDA
– Additional premiums for growth, mkt position/top
brands, key assets
– Can vary with market potential
– RAX
– European transactions with Revs <$20MM - ~5x
EBITDA
• Colocation Services – 10-15+ x EBITDA
– Lower cost of capital, Growth surge
– DataBank
10. Setting The Price
• Care about the cash to you
– Market price may be too high
– Double market price may be worth it
• Market price is Seller’s alternative.
• Terms can affect great deal
– Who bears the risk
– Cash up front vs over time
11. Transaction Type Affects Your Price
• Scale (consolidating) acquisitions
– Cash flow margin to buyer is much higher than to
seller. A margin increase from 30% to 70% means
5x EBITDA to Seller = 2.1x EBITDA to Buyer
• “Marketing” acquisitions
– Acq cost/customer quality vs marketing
• Product & market acquisitions
– Varies with the source of leverage
12. Process
• Finding prospects
• Pre-Letter of Intent (LOI)
– Eliminate deal-killers (e.g. technology)
– Assume data is correct
– Agree on terms, price & no shop
• Post LOI
– Due diligence
– Agree on legal documents
– Prepare migration/transition plan
• Post Closing
– Transition & migration
13. Common transaction issues
• Ability to run the acquired business
– Capabilities or assets
• Buying what you think you are buying
– Hosting revenue vs consulting revenue
• Stability of the customer base
• Transition / migration plans
• Unrealistic goals
– Moving bare metal customers to cloud
14. Suggestions
• Search can be the hardest part
– Look around you
– Develop relationships now
– Don’t overthink it / be opportunistic
• Starter acquisition / M&A experience
• Be nice
• Diligence requires discipline & detail
– Focus on what is important, don’t get lost
• Best transactions work for both sides
15. An M&A Banker Should Bring …
• M&A process
• Business & market knowledge (deal flow)
• Negotiating help
• Transaction structure (Risk reduction)
• Credibility with the other side
• Will tell you to walk away
• Better overall transaction
16. Expanding Your Business
Through Mergers & Acquisitions
Hosting Vendor Customer Conference
October 2016
Amsterdam
Frank Stiff - fstiff@chevalcap.com