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Expanding you business through M&A - Hosting Industry

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M&A presentation for a Hosting Industry Vendor.

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Expanding you business through M&A - Hosting Industry

  1. 1. Expanding Your Business Through Mergers & Acquisitions Hosting Vendor Customer Conference October 2016 Amsterdam
  2. 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. 3. Agenda • Pre-Transaction Questions – Why buy – Acquisition Structures – Where to buy • Valuation & Prices • Process • Common issues and suggestions
  4. 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. 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. 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. 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. 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
  9. 9. Public market prices – Hosting Services
  10. 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. 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. 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. 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. 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. 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. 16. Expanding Your Business Through Mergers & Acquisitions Hosting Vendor Customer Conference October 2016 Amsterdam Frank Stiff - fstiff@chevalcap.com

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