We all know what investment banking is, or at least most of us have learned something about investment banking… thanks to financial crisis. Well today “Investment banker” is probably not the most appreciated job in the world. Sadly most people are tending to think that investment bankers are guilty for the current global economic slowdown. Well I’m not one of them. So when I met Frank from Cheval Capital I was interested of his business. I asked them whether he would talk to B10WH and Daw Blog readers and he said “Yes!”.
Hi Frank, good to talk to you. There is a lot of things anyone would like to ask an investment banker (or at least I think so), during the current crisis. Let me start with this one. Is the financial crisis affecting the web hosting industry? My impression is that web hosting industry looks pretty much as isolated island, that does not need bailouts… It that true?
Hi Dimitar. Its great to talk with you as well. I think your impression is largely right (at least so far.) We’ve talked to a lot of hosters and our sense is that while most are doing fine, growth has slowed. A line from the recent Microsoft conference that rang true was “steady is the new growth.”
After two years of web hosting mergers and acquisitions are the investors still interested of buying hosting companies? Which is the most interesting market niche – data centers and collocation providers, dedicated and managed hosts, VPS providers or Shared hosts?
While we have seen fewer buyers, there are still a number out there. Keep in mind that the most common type of buyer is another hosting company that is choosing to add customers by purchase versus marketing. As this type of buyer tends to buy out of cash flow, financing isn’t a problem.
Right now, we’re being most aggressive in buying shared hosting customers at good prices. Overall, there seems to be demand in all the sectors we work in.
Do you think that once the crisis is over, there will be a growing investor interest in buying cloud computing and cloud hosting technology producers and providers?
I’m not great at predictions. To me, it comes down to value. If cloud operators can add customers at cost effective rates and thus create value, then investors will always be there. Unfortunately, the tech sector is littered with great technologies that no one would buy. All in all though, cloud computing looks pretty good.
I have seen that Cheval Capital have completed 29 transactions in 2008. Do you think you’ll make more in 2009?
I hope the trend continues but you never know ;-). We’ve been very fortunate since we got started in the space in the late 1990’s and have completed over 140 hosting and ISP transactions.
How big web hosting company in annual revenue should have someone to be an interesting client for Cheval Capital?
We work with companies of all sizes. A few years ago we started a small hoster program that is working quite well. We’ve also been involved with some of the industry’s largest transactions. So really, all sizes.
Would you tell me which are the most important things anyone should be prepare when selling a web host hosting company?
That is really hard to answer generically. The key is to have the information that enables you to demonstrate the value of your business and that it has reasonable risk profile. Typically the larger the business, the great the expectation by Buyers of financial and operating metrics.
As you know, there are two broad types of buyers, “Consolidators” that want to buy customers and move them onto their own infrastructure and “Strategic Buyers” that want to purchase the whole company and operate it largely as is. Both will want to confirm:
(1) the amount of revenue that your customers generate and the stability of that revenue
(2) your ability to add new customers at reasonable cost and the ability of the buyer to continue doing so.
The Strategic Buyer will also care about the efficiency of your business and its assets and liabilities.
The top three things all hosters must have are:
- An general overview of you, your company, its operations, etc. (We have a form that we ask sellers to fill out that covers all of these topics.)
- Income statements for the last several months and for the previous year with revenues broken down by the type of business; and
- Backup to confirm those revenues (e.g. paypal, merchant acct stmts, etc.);
What about buyers… what do they want to see when they are looking to invest in web hosting business?
It really varies by buyer and the type of transaction. Some buyers are creative and flexible and will look at anything that gives them a feel for the two items above. Others are less so and require the other extreme of audited financial statements, tax returns, etc. Typically, most Consolidators require less information. I can’t stress enough that the key is to provide the buyer with confidence in the existence and stability of your customer base.
Something about Cheval Capital. Why did you decide to form an investment bank that specializes in web hosting industry? I’m curious how an investment banker decided to come to web hosting market.
Luck. Our specialty has been working with venture capital backed companies that are consolidating industries or markets. In the late 1990’s we got hired by Verio and the Centennial Funds to do ISP acquisitions and it just went from there.
What is your projections about the hosting industry’s developments? Do you expect growth in 2009, or web hosting will be affected from the global crisis?
I think the industry is fortunate in that it is a recurring revenue business with strong margins and, for most, little to no debt. It also provides a service that is absolutely core to business. Those characteristics should protect the industry from major trauma. However, in bad times new company formation will slow and customers will go out of business. Whether this causes the overall industry to shrink or just grow more slowly I don’t know.
Finally, is there are any company/brand in web hosting that you’ll love to consult, sale or buy?
We’ve been very lucky to work with a lot of great companies in the web hosting business, both large and small. My hope is that it will continue.