ISP Valuation: From the Horse's Mouth
In a conference session held at Fall ISPCON '99, a group of industry merger and acquisitions experts discussed the ever-popular topic of how ISPs are valued in the current market.
by Ted Stevenson ISP-Planet Managing Editor [November 10, 1999]
The panel for 'How Much is Your ISP and Web Hosting Company Worth?' was headed by Craig Moseley, a Vice President at the the communications and media investment bank Daniels & Associates. The other three panelists were all highly experienced merger/acquisitions executives:
Seth Levine Director of Corporate Development at FirstWorld (which has acquired 8 Internet services businesses)
Dean Brophy, VP Corporate Development at Verio (now dealing with the aftermath of approximately 50 acquisitions)
David Shires VP Business Development at Voyager.net (which has made 23 acquisitions over last 18 months)
The group addressed two broad topics:
Valuation metrics
Attributes investors look for
We'll follow this scheme in presenting a two-part report on the discussion.
Flexible metrics
In his opening remarks about valuation metrics, Moseley laid down themes that were echoed frequently by others over the remainder of the session. His basic point, hammered home repeatedly, was that there is no across-the-board measure or formula for valuing a service provider. "It depends on the characteristics of your business," Moseley said. He then detailed a list of eight criteria that are influential in determing a company's value:
Quality of management team
Potential for revenue growth
Market position
Scalability of infrastructure and operations controls
Depth of technical talent
Sales and marketing effectiveness
Value-added service offering
Ability to generate positive cash flow (EBITDA)
Public vs. private markets
Moseley was quick to distinguish between pricing levels in acquisitions by private companies and those made by publicly funded ones.
Historically, public-market valuations have been quite high relative to the private market. In 1995 they averaged an amazing 12 times annual revenue. They dropped '96, hit bottom in 97, and have been climbing since, up as high as 10 times revenue. Privately traded ISPs have experienced very steady slow growth -about one multiple over the same 5 year period.
In terms of hard numbers, Moseley offered a spectrum breakdown of public ISP valuations, based on 14 companies (expressed in multiples of annual revenue).
High 12.4 x revenue
Median 4.9 x revenue
Mean 4.6 x revenue
Low 2.7 x revenue
Companies at the higher end of the spectrum tend to be acquisitions by value-added providers, Moseley said, citing Verio as an example. Those at the lower end tend to be purchases by consumer consumer-oriented companies, such as FlashNet.
Regarding acquisitions in the private market, Moseley passed on some valuation averages for past 24 months. These he broke down by company characteristics and the type of acquisition.
Regional & dominant local ISPs 2.3 x revenue
Top 25 shared-server hosting companies 4.2 x revenue
National transit providers 4.6 x revenue
Access?customer base only 0.8 x revenue
Hosting?customer base only 1.72 x revenue
Moseley's parting tip was "Brand-name recognition ups the price."
Valuation lens
Verio's Dean Brophy followed up Moseley's remarks on metrics by discussing the foundations of an acquirer's real-world valuation. "Where we create value in the marketplace is around recurring revenue," Brophy said.
Observing that some of Verio's buys had been for figures as high as 10 x revenues, Brophy stressed a fundamental point: "A company's worth is ultimately based on what use the purchaser can make of the asset."
As illustrations, Brohpy cited Verio's purchase of Hiway/Best for 5.5 x revenue, based on its "great infrastructure." About the 10 x acquisition?Digital Nation?he said the business was now "growing at a fantastic rate," citing "obscene profit levels."
As an aid to CEOs trying to assess their value on the market, Brophy provided his working list of Valuation Considerations (in no particular order):
Profitiability
Revenue growth
Management team - quality and specific personnel
Location
Infrastructure
Lines of business
Condition of corporate entity [must be good]
Scale
Quality of technical team
Quality of bankers
What can we do with this asset?
Whether sellers would take stock in partial payment
In connection with his final bullet point, Brophy pointed out that a number of Verio acquirees had multiplied the proceeds of acquisitions several-fold by agreeing to accept stock-as the value of that stock rose.
Valuation 101
ISPs seem to spend a lot of their time plotting exit strategies and asking What's my company worth in today's market? Here are some simple?and not-so-simple?answers.
[June 9, 1999]
In a thread on ISP-CLEC in May of 1999, BS asked:
"What would be a normal valuation for an ISP with these numbers: In 1997 an ISP business (founded in 1996) that was profitable with monthly revenue of $3 million. It had 10,000 local access lines and regulatory co-carrier authorizations from five states with six others pending."
[LL wrote] "$500 per subscriber is the going rate."
[BCR wrote] "We are a professional M & A firm, and, we typically use three methods:
Discounted cash flow
Multiple of EBDITA
Multiple of revenue.
We will not use revenue multiples unless a company has positive cash flow or it has a consumer base larger than 500,000.
Typical valuations have factored in all three of these variables using multiples of 7 x EBDITA, 2 x revenue, or projected cash-flow discounted 30 percent per year for early-stage companies with impressive initial growth."
[DM wrote] "Valuation grows exponentially with the number of subscribers. This is why many have attempted to aggregate multiple small ISPs into larger entities."
[MC wrote] "The most recent valuation models I've seen use multiples of revenues (latest three months annualized) according to number and type of subscriber."
Size
"major" isps have > 10k subs
2nd tier have between 5k and 10k
3rd tier have between 1k and 5k
Type
Dial-up
major (1.8 - 2.3 times revenue)
2nd tier (1.1x -1.3x)
3rd tier (0.6x - 0.9x)
Dedicated access
major (2.0x - 2.3x)
2nd (1.5x - 1.8x)
3rd (0.9x - 1.5x)
Web hosting
major (5.0x - 8.5x)
2nd (3.5x - 5.0x)
3rd (1.1x - 1.5x)
"Hence a reason to aggregate and arbitrage up."
[NR wrote] "Our company is a small ISP located in PA. We recently received offers between $450 and $700 per subscriber. Many companies are offering a deal that's part cash and part stock. You don't receive your cash until the IPO, and then you have to hold their stock for a term such as 6 months or a year.
Anyone have any thoughts on the stock portion of these deals? I forgot to mention that all of your liabilities must be paid in full too."
[RY wrote] "Publicly traded ISPs are valued anywhere between $2,000 and $3,000 per subscriber. $500 looks too cheap, leaving an opening for some enterprising someone to arbitrage the difference by buying your ISP along with others at from $30 to 500/head and roll them up into a public company which the market then values at $2500/head.
You do all the HARD work building from $0 to $500, then someone else does the easy part of going from $500 to $2500 in the six months it takes to bring out an IPO."
[CJS wrote] "I believe that $500 per subscriber is a very attractive price for a "small" ISP. Your assumption?that doing an IPO is the easy part?is simply not correct. Taking a company public is a lot of work and expense. Also, it is risky. If you don't have a credible management team in place, you won't get a premium in the marketplace. The credible management team will be expensive.
If you are taking half of your money in stock and the IPO is successful, you can participate in the premium price. The opening is there and people are taking advantage of it. But it does take effort to make it successful. Look at the other side, if the markets were not giving premiums your subscribers would be only worth $30 to $65, or the cost to acquire."
The Bottom Line On Valuation
The ISP-Investors list discusses how prices are made in the market for small ISPs.
[March 24, 2000]
On the ISP-Investors list in January, KR brought up an "evergreen" issue:
"I am considering acquiring a small ISP (500 corporate customers/500 private customers). Does anybody know any multiples that can be used for a quick valuation?"
One respondent pointed out that while there are myriad variables involved in ISP transactions, the type of valuations fall into two categories:
[BE wrote] "We have seen two general types of valuations: (1) private market and (2) public. Public transactions have their own unusual dynamic with multiples ranging from 5 times annual revenues to over 15 times annual revenue. Private market transactions have ranged from .5 times annual revenue to 3.0 times annual revenue. The lower range was usually for ISP's with less than 1,000 subscribers, little or no "other revenue" like web hosting, and no prospects for growth. At the higher end of the range were ISP's with more than 5,000 subscribers, web hosting or other revenue and a market with growth potential."
Another respondent posted figures that elicited a slew of posts:
[EL posited] "If cash or cash and note, 1.5 to 2 times the monthly recurring revenue less liabilities and assuming that they charge in a normal price range ($15 to $22) that you will be able to maintain."
[Jim argued that this valuation was unrealistic] "I can image anyone would buy at 1.5 to 2 times monthly revenues. If you charge $20 a month, that means $30 to $40 dollars a subscriber on a cash basis. A more realistic value would be 1.0 to 1.5 times annual revenues on an all cash basis and 1.5 to 2.0 times annual revenues on a part cash, part stock basis. Take a look at what subscribers become worth when they reach public status at www.isp-planet.com/subvalues.html."
[LB piped in] "These valuations are interesting from an industry standpoint, but realistic numbers for smaller ISP acquisitions are generally lower. I believe that 10 to 12 times monthly revenue is closer to the real number these days for less than 10,000 accounts, especially if you are selling to someone who's intent is not to go public in the near future."
A number of respondents pointed out that the subscriber base would effect the price of an ISP:
[GS added his 2 cents' worth] "Think more like $250 per subscriber for under 1,000. All cash if you're lucky. The ISP-Planet valuations are for 3,000 to 5,000 subscribers."
[Ed. note: ISP-Planet valuations are for much larger ISPs. It's very difficult to get prices for "small purchases" because the purchased company is usually private and the terms of the deal are rarely disclosed.]
[BE added] "The subscription rate can impact this valuation multiple in several ways. If the rate is $20 - $25 per month and the subscribers are all residential the multiple may be depressed as buyers will expect that competition will drive the rate lower in the future, and residential accounts suffer more churn than business accounts. If the rate is less than $15 per month the multiple might be enhanced because the buyer anticipates 'other revenue' potential and/or likes the competitive position of the relatively lower rate. At $9.95 not many competitors can beat you on price unless they go completely to advertising revenue and give the ISP service away for free."
[SR noted some other issues that affect valuation] "To what extent do these factors affect the valuation: 1) Being the only ISP in the area with local access numbers? 2) How important is the quality of infrastructure? and 3) Does the fact that we're quite profitable have any impact on our valuations, or do most potential purchasers see it simply as an opportunity to pick up X number of customers?"
The question of infrastructure sparked a small conflagration:
[GS opined] "In most cases buyers don't seem to care about the infrastructure. They are buying your customers; in many cases only the customers."
[MH strongly disagreed] "We own a 10000+ square foot NOC with multiple fiber connections and local loops that we own, rooftop microwave links, etc. Two to three times annual revenue does not even come close to meeting our investment in facilities. The 'formula' approach does not work. We think that buying customers from a virtual or 'near facility-less' ISP for up to three times annual revenues is overvaluing the business; it's only supported by an incredible combination of ready venture capital and stock prices."
Which caused one respondent to point out the inevitable bottom line:
[MB wrote] "If the facilities are required but the revenue does not cover the cost of depreciating the "facilities", then the business model is flawed. Until there is a change in the business model, your business is not worth anything by 'traditional' business pricing standards. That's not to say that 'dot com' pricing may not value the business differently, but at some point even 'dot com' companies have to return money (from operations) to the investors."
ISP Valuation: From the Horse's Mouth
In a conference session held at Fall ISPCON '99, a group of industry merger and acquisitions experts discussed the ever-popular topic of how ISPs are valued in the current market.
by Ted Stevenson ISP-Planet Managing Editor [November 10, 1999]
The panel for 'How Much is Your ISP and Web Hosting Company Worth?' was headed by Craig Moseley, a Vice President at the the communications and media investment bank Daniels & Associates. The other three panelists were all highly experienced merger/acquisitions executives:
Seth Levine Director of Corporate Development at FirstWorld (which has acquired 8 Internet services businesses)
Dean Brophy, VP Corporate Development at Verio (now dealing with the aftermath of approximately 50 acquisitions)
David Shires VP Business Development at Voyager.net (which has made 23 acquisitions over last 18 months)
The group addressed two broad topics:
Valuation metrics
Attributes investors look for
We'll follow this scheme in presenting a two-part report on the discussion.
Flexible metrics
In his opening remarks about valuation metrics, Moseley laid down themes that were echoed frequently by others over the remainder of the session. His basic point, hammered home repeatedly, was that there is no across-the-board measure or formula for valuing a service provider. "It depends on the characteristics of your business," Moseley said. He then detailed a list of eight criteria that are influential in determing a company's value:
Quality of management team
Potential for revenue growth
Market position
Scalability of infrastructure and operations controls
Depth of technical talent
Sales and marketing effectiveness
Value-added service offering
Ability to generate positive cash flow (EBITDA)
Public vs. private markets
Moseley was quick to distinguish between pricing levels in acquisitions by private companies and those made by publicly funded ones.
Historically, public-market valuations have been quite high relative to the private market. In 1995 they averaged an amazing 12 times annual revenue. They dropped '96, hit bottom in 97, and have been climbing since, up as high as 10 times revenue. Privately traded ISPs have experienced very steady slow growth -about one multiple over the same 5 year period.
In terms of hard numbers, Moseley offered a spectrum breakdown of public ISP valuations, based on 14 companies (expressed in multiples of annual revenue).
High 12.4 x revenue
Median 4.9 x revenue
Mean 4.6 x revenue
Low 2.7 x revenue
Companies at the higher end of the spectrum tend to be acquisitions by value-added providers, Moseley said, citing Verio as an example. Those at the lower end tend to be purchases by consumer consumer-oriented companies, such as FlashNet.
Regarding acquisitions in the private market, Moseley passed on some valuation averages for past 24 months. These he broke down by company characteristics and the type of acquisition.
Regional & dominant local ISPs 2.3 x revenue
Top 25 shared-server hosting companies 4.2 x revenue
National transit providers 4.6 x revenue
Access?customer base only 0.8 x revenue
Hosting?customer base only 1.72 x revenue
Moseley's parting tip was "Brand-name recognition ups the price."
Valuation lens
Verio's Dean Brophy followed up Moseley's remarks on metrics by discussing the foundations of an acquirer's real-world valuation. "Where we create value in the marketplace is around recurring revenue," Brophy said.
Observing that some of Verio's buys had been for figures as high as 10 x revenues, Brophy stressed a fundamental point: "A company's worth is ultimately based on what use the purchaser can make of the asset."
As illustrations, Brohpy cited Verio's purchase of Hiway/Best for 5.5 x revenue, based on its "great infrastructure." About the 10 x acquisition?Digital Nation?he said the business was now "growing at a fantastic rate," citing "obscene profit levels."
As an aid to CEOs trying to assess their value on the market, Brophy provided his working list of Valuation Considerations (in no particular order):
Profitiability
Revenue growth
Management team - quality and specific personnel
Location
Infrastructure
Lines of business
Condition of corporate entity [must be good]
Scale
Quality of technical team
Quality of bankers
What can we do with this asset?
Whether sellers would take stock in partial payment
In connection with his final bullet point, Brophy pointed out that a number of Verio acquirees had multiplied the proceeds of acquisitions several-fold by agreeing to accept stock-as the value of that stock rose.
Valuation 101
ISPs seem to spend a lot of their time plotting exit strategies and asking What's my company worth in today's market? Here are some simple?and not-so-simple?answers.
[June 9, 1999]
In a thread on ISP-CLEC in May of 1999, BS asked:
"What would be a normal valuation for an ISP with these numbers: In 1997 an ISP business (founded in 1996) that was profitable with monthly revenue of $3 million. It had 10,000 local access lines and regulatory co-carrier authorizations from five states with six others pending."
[LL wrote] "$500 per subscriber is the going rate."
[BCR wrote] "We are a professional M & A firm, and, we typically use three methods:
Discounted cash flow
Multiple of EBDITA
Multiple of revenue.
We will not use revenue multiples unless a company has positive cash flow or it has a consumer base larger than 500,000.
Typical valuations have factored in all three of these variables using multiples of 7 x EBDITA, 2 x revenue, or projected cash-flow discounted 30 percent per year for early-stage companies with impressive initial growth."
[DM wrote] "Valuation grows exponentially with the number of subscribers. This is why many have attempted to aggregate multiple small ISPs into larger entities."
[MC wrote] "The most recent valuation models I've seen use multiples of revenues (latest three months annualized) according to number and type of subscriber."
Size
"major" isps have > 10k subs
2nd tier have between 5k and 10k
3rd tier have between 1k and 5k
Type
Dial-up
major (1.8 - 2.3 times revenue)
2nd tier (1.1x -1.3x)
3rd tier (0.6x - 0.9x)
Dedicated access
major (2.0x - 2.3x)
2nd (1.5x - 1.8x)
3rd (0.9x - 1.5x)
Web hosting
major (5.0x - 8.5x)
2nd (3.5x - 5.0x)
3rd (1.1x - 1.5x)
"Hence a reason to aggregate and arbitrage up."
[NR wrote] "Our company is a small ISP located in PA. We recently received offers between $450 and $700 per subscriber. Many companies are offering a deal that's part cash and part stock. You don't receive your cash until the IPO, and then you have to hold their stock for a term such as 6 months or a year.
Anyone have any thoughts on the stock portion of these deals? I forgot to mention that all of your liabilities must be paid in full too."
[RY wrote] "Publicly traded ISPs are valued anywhere between $2,000 and $3,000 per subscriber. $500 looks too cheap, leaving an opening for some enterprising someone to arbitrage the difference by buying your ISP along with others at from $30 to 500/head and roll them up into a public company which the market then values at $2500/head.
You do all the HARD work building from $0 to $500, then someone else does the easy part of going from $500 to $2500 in the six months it takes to bring out an IPO."
[CJS wrote] "I believe that $500 per subscriber is a very attractive price for a "small" ISP. Your assumption?that doing an IPO is the easy part?is simply not correct. Taking a company public is a lot of work and expense. Also, it is risky. If you don't have a credible management team in place, you won't get a premium in the marketplace. The credible management team will be expensive.
If you are taking half of your money in stock and the IPO is successful, you can participate in the premium price. The opening is there and people are taking advantage of it. But it does take effort to make it successful. Look at the other side, if the markets were not giving premiums your subscribers would be only worth $30 to $65, or the cost to acquire."
The Bottom Line On Valuation
The ISP-Investors list discusses how prices are made in the market for small ISPs.
[March 24, 2000]
On the ISP-Investors list in January, KR brought up an "evergreen" issue:
"I am considering acquiring a small ISP (500 corporate customers/500 private customers). Does anybody know any multiples that can be used for a quick valuation?"
One respondent pointed out that while there are myriad variables involved in ISP transactions, the type of valuations fall into two categories:
[BE wrote] "We have seen two general types of valuations: (1) private market and (2) public. Public transactions have their own unusual dynamic with multiples ranging from 5 times annual revenues to over 15 times annual revenue. Private market transactions have ranged from .5 times annual revenue to 3.0 times annual revenue. The lower range was usually for ISP's with less than 1,000 subscribers, little or no "other revenue" like web hosting, and no prospects for growth. At the higher end of the range were ISP's with more than 5,000 subscribers, web hosting or other revenue and a market with growth potential."
Another respondent posted figures that elicited a slew of posts:
[EL posited] "If cash or cash and note, 1.5 to 2 times the monthly recurring revenue less liabilities and assuming that they charge in a normal price range ($15 to $22) that you will be able to maintain."
[Jim argued that this valuation was unrealistic] "I can image anyone would buy at 1.5 to 2 times monthly revenues. If you charge $20 a month, that means $30 to $40 dollars a subscriber on a cash basis. A more realistic value would be 1.0 to 1.5 times annual revenues on an all cash basis and 1.5 to 2.0 times annual revenues on a part cash, part stock basis. Take a look at what subscribers become worth when they reach public status at www.isp-planet.com/subvalues.html."
[LB piped in] "These valuations are interesting from an industry standpoint, but realistic numbers for smaller ISP acquisitions are generally lower. I believe that 10 to 12 times monthly revenue is closer to the real number these days for less than 10,000 accounts, especially if you are selling to someone who's intent is not to go public in the near future."
A number of respondents pointed out that the subscriber base would effect the price of an ISP:
[GS added his 2 cents' worth] "Think more like $250 per subscriber for under 1,000. All cash if you're lucky. The ISP-Planet valuations are for 3,000 to 5,000 subscribers."
[Ed. note: ISP-Planet valuations are for much larger ISPs. It's very difficult to get prices for "small purchases" because the purchased company is usually private and the terms of the deal are rarely disclosed.]
[BE added] "The subscription rate can impact this valuation multiple in several ways. If the rate is $20 - $25 per month and the subscribers are all residential the multiple may be depressed as buyers will expect that competition will drive the rate lower in the future, and residential accounts suffer more churn than business accounts. If the rate is less than $15 per month the multiple might be enhanced because the buyer anticipates 'other revenue' potential and/or likes the competitive position of the relatively lower rate. At $9.95 not many competitors can beat you on price unless they go completely to advertising revenue and give the ISP service away for free."
[SR noted some other issues that affect valuation] "To what extent do these factors affect the valuation: 1) Being the only ISP in the area with local access numbers? 2) How important is the quality of infrastructure? and 3) Does the fact that we're quite profitable have any impact on our valuations, or do most potential purchasers see it simply as an opportunity to pick up X number of customers?"
The question of infrastructure sparked a small conflagration:
[GS opined] "In most cases buyers don't seem to care about the infrastructure. They are buying your customers; in many cases only the customers."
[MH strongly disagreed] "We own a 10000+ square foot NOC with multiple fiber connections and local loops that we own, rooftop microwave links, etc. Two to three times annual revenue does not even come close to meeting our investment in facilities. The 'formula' approach does not work. We think that buying customers from a virtual or 'near facility-less' ISP for up to three times annual revenues is overvaluing the business; it's only supported by an incredible combination of ready venture capital and stock prices."
Which caused one respondent to point out the inevitable bottom line:
[MB wrote] "If the facilities are required but the revenue does not cover the cost of depreciating the "facilities", then the business model is flawed. Until there is a change in the business model, your business is not worth anything by 'traditional' business pricing standards. That's not to say that 'dot com' pricing may not value the business differently, but at some point even 'dot com' companies have to return money (from operations) to the investors."
No comments:
Post a Comment