ISP Acquisition Strategies

Aquisition is a tried and true strategy for growing an ISP—but it's not as easy as it may sound. Here are some tips from the pros.

by Christopher Knight [October 5, 1999]

First, a definition:

ISP Acquisition Department - An individual or a team responsible for identifying promising acquisition targets. Some ISP acquisition departments then proceed to negotiate finished deals, other simply pass on recommendations to the CEO for evaluation.

Today's article dives into strategies used by ISP acquisition departments to achieve win-win deals for their firms in terms of subscriber-base and ISP-asset acquisitions.

Setting reasonable expectations
David Shires has aided in dozens of ISP acquisitions and is one of the folks in charge of acquisitions for Voyager.net, Inc. In a recent conversation, Shires made it clear that the expectations of the owner of the ISP his firm is evaluating are a key to determining whether a good deal can be arranged or not.

Shires pointed out that in many instances, the ISP owner has never sold a business before and needs to be educated as to how the acquisition will or can take place. By bringing the owner up to speed, he is often able to help shape realistic expectations, improving the chances of a successful buy/sell relationship.

Identifying good targets
A good starting point for acquisition is creating a highly detailed profile of what your ideal acquisition would look like. This might include—

• Size of the ISP
• Its geographic location
• Product price points
• Growth and churn rate
• Asking price

When you actually begin negotiations with a potential acquiree, you'll want to examine financial statements for the year to date and the past 3 to 5 years, plus any other critical success indicators of the ISP.

Tip: If you hand the acquisition target a list of 50 simple questions to help you do your due-diligence work, and it takes them 3 to 4 weeks to provide the data, you can reasonably conclude that the ISP is not overly organized. This may be symptomatic of how they've been running their business.

Bigger is better
Large ISPs often make ideal acquisition candidates because—

• You're acquiring more subscribers per deal negotiated.
• The larger the ISP, the more likely it is that the business will be further evolved, with a better back office and more highly developed customer management.
• Their POPs are more likely to 100 percent digital, which saves you the cost of upgrading analog lines.

Less is more
Cliff Bryant of MindSpring Enterprises, Inc. has aided in many of Mindspring's ISP acquisitions. The deals Bryant likes best are ISPs who have Internet access, website design or hosting, possibly own a PC shop, and are just looking to sell off their ISP dialup division, so that they can return to their core business. He's leery of deals where the ISP is selling out lock, stock, and barrel. He believes that firms that are just spinning off their ISP division will care more about their reputation after the sale and will be of greater assistance during the conversion process, compared with the ISP who is cashing out with a clean exit.

Bryant had this advice for ISPs who want to get maximum valuation for their companies: "Run your business like it will be a viable business. Keep your accounting and customer database in great shape, continually improve and position your business as if you were going to run it for ever. If you run your business like you're just waiting to get out, you put yourself in a weak position."

On the same topic Shires said, "If [the ISP Acquisition target] is red and bleeding, sometimes we can't save it . . . so we let them go. We do an incredible amount of pre-acquisition research and walk away from quite a few deals. A bad company at a good price is still a bad deal."

Warning signs
Any of the following situations is a potential red flag for your acquisition process—

• The ISP paints a good picture, but when you visit their resellers or talk with their customers, the real stories about how they handle their customers don't measure up.
• The geographical reach doesn't map well with your existing POP infrastructure. Providing service to your new subscribers may incur cost more than you expected.
• Product price points are substantially different-especially where the acquiree's price is much lower. If its subscribers are paying $5 to $8 less than you charge, chances are high that you will experience a high level of churn as you attempt to convert them to your higher price point.
• The ISP owner has a hard time providing historical data, and/or when you ask probing questions, you get conflicting answers on key areas of the business.
• When your potential target wants more than market price for his or her subscriber base, and won't budge.
• Your acquisition target is pressuring you to move quickly. This can be a sign that they've run out of cash or have skeletons in the closet that they've not told you.
• If you and your network aren't ready to scale to meet the labor, network, and, bandwidth, demands that the acquisition will create. It may be better to chill and wait till you are ready.

Finding ISPs to Buy
Networking, networking, networking is the name of the game here. You'll need to mingle with ISPs at every available opportunity to get into the know and flow as to who is on the verge of selling and which ISPs might make perfect targets for your firm.

The many ISP conferences are great opportunities to meet a concentrated group of ISPs. This includes national/regional events, such as Penton's ISPcon, ISP/C's ISP Forum, IIR's The ISP Forum, The ISP Business Forum, The ISP Summit, and various state or local gatherings of ISPs.

Another great resource is the ISP-Investor email discussion list, which hosts the majority of the players—buyers, sellers, and M&A firms that represent ISPs. To join, send an email to join-isp-investor@isp-investor.com. There are over 2,350 members on this community—and it's a free resource.

To Your ISP Acquisition Success!
Christopher Knight
Founder & Managing Editor of the ISP-Lists Discussion Community

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