Cheval Capital's mergers and acquisitions work runs the gamut from very small to very large transactions.

by Jeff Goldman [July 19, 2006]

Hillary and Frank Stiff met back in the late '80s, when he was an investment banker helping her telecom company raise capital. When that company was acquired, she moved into investment banking as well—and at that point, the two say, they realized it just made sense to start their own firm instead of working for other people. That firm, Cheval Capital, is a boutique investment bank focusing on mergers and acquisitions as well as financings and IPOs.

Cheval's first ISP client was Verio, for whom the firm handled a series of acquisitions in the mid to late '90s at valuation levels, Hillary says, that they haven't seen since. "We had done work with Centennial Funds out in Denver, and when they started Verio, they called us," she says. "We agreed to help them by doing their acquisitions on the East Coast of ISPs and eventually of hosting companies as well."

Having made it through the past decade, Hillary says they like to call themselves historians. "It was interesting to watch internet and hosting back in the embryonic stages, when everybody was so optimistic but often basic principles weren't used—enthusiasm, caffeine and foosball were generating the momentum in the industry," she jokes. "And it's really come full circle: we've watched it grow up from a baby to become a mature industry with lots of great, professional companies involved."

Big guys and smaller guys
Frank says Cheval works in two different ways. One is to get hired by a venture-backed company like Verio that wants to do a series of acquisitions over a period of years. "We'll help them put together a consolidation program," he says. "We help them understand the documents, the business, the valuations, the economics, soup to nuts."

The other way that Cheval works is as a clearinghouse for smaller buyers and sellers. "As we become aware of buyers or sellers that are looking to do a transaction, we have a deal list that we put them on, we distribute it around, and we try to act as a facilitator to those guys to get transactions done," Frank says. "When you're a big guy in the marketplace, it's easy to get help and hire bankers and get things done—but when you're a smaller guy, it's often much more difficult, and so we're trying to help out that group."

For the larger transactions, fees are generally structured on the Lehman scale—and for the clearinghouse, in which case Cheval is representing the parties on both sides of the transaction, the buyer pays Cheval five percent of the transaction fee. "If there was a significantly larger deal, we may agree to a Lehman scale on it, but a lot of these are small, so it's just a set five percent," Hillary says. "And we're paid when the seller's paid—so if the seller's paid over time, we'll take our fee over time."

Letting referrals come in
The vast majority of Cheval's work, Hillary says, comes in through referrals. "They find us," she says. "We're a small firm, and we don't advertise: we've always been more than busy just by letting referrals come in for the big clients. And the small ones come in just because we've been out in the industry so long, and we do so many transactions—we've done about 75 hosting/ISP transactions, 16 so far this year—and we've been around since the dawn of time."

And there's really no size limitation on the deals Cheval will consider—the only limitation, Hillary says, lies in the kind of business involved. "Somebody may call up with some type of telecommunications company or some type of ancillary software that I just know I don't have any buyers on, so it doesn't make sense," she says. "But if it's something that I think we'll have buyers for, we'll list it."

What makes an ISP attractive for purchase? Frank says the answer is simple—a well-run business and a reasonable expectation of value. "The people that get transactions done the fastest are the ones that have a sense of what the valuation in the marketplace is, and that valuation is okay with them," he says. "And they run a clean business—they've got some sense of financial statements, they know how many customers they have, they know what their attrition rates are, and they've got good control of their information."

That kind of organization, Frank says, has become much easier to find than it used to be. "More business and marketing people have moved into the space, particularly in hosting, which has a lot of marketing folks running businesses," he says. "It used to be mostly technical folks—there were a lot of guys who started a webhosting company because they thought it would be cool to do it—and that's changed over time."

—End