In The News
SOURCE: ISP Planet

ISPCON: THE BANKERS SPEAK
Bankers at ISPCON told attendees that the ISP universe is changing, again, rewarding certain types of business while punishing others.

by Alex Goldman
ISP-Planet Managing Editor
ISP-Planet Daily HTML Newsletter for June 1, 2006

Paul Stapleton, banker and former author of the I$P Webhosting Report (now working at DH Capital), opened ISPCON's financial session by noting that IPOs are trendy again. Since the bust, internet IPOs have all but disappeared, and companies have tried to disassociate themselves from the internet. United Online, for example, now calls itself a provider of services, not an ISP.

But service providers are preparing some high profile IPOs. Clearwire, GoDaddy, and Vonage have all filed S-1s with the SEC, stating their intent to conduct an IPO. Since ISPCON, Vonage had its IPO.

Tom Millitzer, president and founder of New Commerce Communications, noted that last year there were zero ISP IPOs.

He added that some ISPs (and WISPs) are now obtaining loans from the SBA.

Stapleton said, "there was a time when bankers loaned five times cash flow to dialup providers. But they lost it all except for some sales to EarthLink. Today, private equity is most interested in MSPs. The ARPU at these businesses is at least $500 per month, if not $1,000. Loans start at $10 million."

"Bankers are also looking at companies that disintermediate the telco. WiMAX is getting looked at, as are rural ILECs," Stapleton added.

How much am I worth?
Eden Recor of Ground County Internet Services asked what his business was worth.

Joe Bardenheier is vice president of corporate development at Endurance International Group, a company that has acquired some notable webhosts in an acquisition spree of 27 companies in four years. A recent acquisition (assisted by DH Capital) was FatCow.

Bardenheier said potential buyers have many questions. Buyers worry how much equipment will need to be replaced, and how soon (especially if the acquisition is a WISP). They want to know whether customers buy all a company offers, or just a few services.

A host with a good infrastructure may not care about your equipment. "We generally migrate customers off the seller's infrastructure on to ours," he said. "Many sellers don't have as good infrastructure as we do."

If you have several business lines, you many not be able to sell them all.

"We don't see buyers looking for residential customers except in very rural areas," said Millitzer.

Bardenheier said that some companies sell their hosting business to him and retain their residential dialup customers.

Millitzer said that the theoretical upper limit on price is governed in part by the pace of change in the industry. "Getting more than four times annual revenue is tough in this business," he said. Since a company can expect fundamental changes over that period of time, they cannot write up revenue projections that far into the future.

"We're all buyers and sellers at the right price," Stapleton concluded.

Stapleton then asked whether his panelists did structured deals, which he defined as "any form of payment other than cash at closing."

Millitzer said that sellers like cash, and therefore he sees it as his job to get cash, "but we can negotiate about when the cash is paid."

Be prepared
Millitzer, as the speaker representing the sell side, Bardenheier, the speaker representing the buy side, and Stapleton, the speaker representing those who lend the money, all agreed that a seller must provide good data.

Millitzer said it's his job to help. "We know how to present the seller to a buyer. We create a 20 to 60 page presentation. As a seller, you want two to five potential buyers in a two week time frame. We give you 115 questions in our questionnaire, and produce 17 spreadsheets."

Bardenheier added, "we ask certain questions. If we don't get an answer, we walk away."

Millitzer agreed. "If we get information in two weeks, that's great. If it takes three months, that's bad."

Stapleton, agreed, noting that a good business already has and uses the information it needs to provide. "The data you provide should be similar to the data you use to run your company," he said.

If it all comes together, a seller can get a good offer in a relatively short period of time, but some sellers decide to wait and try to get a better offer. It doesn't always come, Millitzer warned.

The buy side
One attendee said, "we're a small webhost and just made our first acquisition. What have you learned during four years?"

Bardenheier replied that you need a coach to oversee the process of integrating the new company. "The most we've done is more than four companies at the same time, but we only did that once. Now we have all the steps written down, and that makes it easier. Still, the toughest job is integrating and migrating the customers without causing disruptions."

Conclusion
ISP-Planet has said before that ISPs should acquire VAR skills. Doing so promises increased ARPU, as well as the ability to sell the business or obtain financing.

Nevertheless, residential ISP, especially those that are not regularly replacing equipment (dialup and hosting) can generate significant profits-enough cash to fund acquisitions or new businesses.