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.

—End

Tune in tomorrow for the sequel to today's story: Maximizing Your ISP's Marketability

.