Daniels, founded in 1958, helps ISPs with a wide range of financial services including mergers and acquisitions.

by Jeff Goldman [June 21, 2006]

Daniels & Associates was founded in 1958 as an investment bank focusing on the cable business, and it soon expanded into other areas of telecom. "We tend to get involved very early in new sectors where there is both a need for financing for growth in that sector, and the potential for consolidation of service providers," says company Managing Director Bob Allison.

Daniels started working with ISPs, Allison says, in 1995. "What we saw was a business model that looked very similar to the businesses that we already worked with—the network-based communication service providers who had a recurring revenue business model," he says. "That was a model that we understand from a growth standpoint, from a financing standpoint, and from a valuation standpoint."

Daniels & Associates 3200 Cherry Creek South Drive, Suite 500, Denver, CO 80209 Voice: (303) 778-5555 mailto: info@danielsonline.com

The company's first ISP client was Verio, which Daniels helped with a series of ISP acquisitions. "Overall, in the second half of the '90s, we closed on 28 transactions for Verio," Allison says. "Most of those were acquisitions of commercial ISPs around the country—and starting in '97, we worked with them on acquisitions of webhosting operations as well."

Daniels & Associates Senior Managing Director Craig Moseley says the work with Verio proved to be an excellent learning experience for Daniels. "It gave us a lot of knowledge on who was doing what—not only who the providers were, but also from a technology standpoint and a business standpoint, how you position a business in the most attractive light, which, for any seller, is very important," he says.

Buyers and sellers
Daniels & Associates represents both buyers and sellers—and Allison says the firm works strenuously to avoid anything that could seem like a conflict of interest between the two. "First of all, we're obviously never going to represent a buyer and a seller at the same time—and we don't work with buyers in any situation where we may end up having to make a choice between buyer and seller," he says.

While Daniels sees its extensive industry relationships as a key strength, Allison admits they can also cause confusion. "Because we know so many people in the industry, we do run into situations where we have to make a call on conflict of interest, and we're very careful to always make people aware of any potential conflicts that we have," he says. "But we do think that our relationships with most of the more significant operators in this space gives us an advantage when we're trying to get a transaction closed."

Moseley says Daniels & Associates' focus for mergers and acquisitions is on transactions of more than $5 million. "We get a lot of calls from smaller ISPs, and we're helpful, but we generally won't take on those types of engagements," he says. "We'll refer those people to other folks who have a stronger expertise in being able to help those smaller ISPs find a local or regional acquirer."

The company's fees, Moseley says, usually include a retainer plus a percentage of the sales price, with the percentage depending on the size of the transaction. "It's success fee-based, with a very minimal retainer," he says. "We're not in it to make the retainer—we won't take an assignment unless we're pretty positive we can get it done."

Raising capital
In addition to mergers and acquisitions, Daniels also helps companies raise capital. "We focus on raising private equity and private debt—meaning, on the private equity side, placement with a venture capital fund or a private equity fund; and on the debt side, it can be anything from finding big financing to working with some of the more non-traditional lenders such as mezzanine funds and hedge funds," Allison says.

The financing side of the business, Allison says, makes up about one third of Daniels' work, with mergers and acquisitions making up the other two thirds. "Overall, we're seeing renewed interest in all these sectors among both equity investors and debt lenders," he says. "That's been a very positive development, and it's already resulted in an increased pace of M&A activity—and we think that will continue."

With so much consolidation in the industry, Moseley says Daniels has increasingly been working on divestitures of business lines from larger companies—like the sale of Verio's T-1 business to Cogent in 2004. "We'll look for some of these larger folks who have internet connectivity businesses but no longer find them to be core businesses, and we'll try to find a home for those customer bases," he says.

While such companies have been paring their businesses down to a core set of services in order to survive, Moseley says, they've recently begun to look for ways to accelerate their growth. "They're adding service offerings again," he says. "It's an ebb and flow. We're starting to see more of an expansion characteristic in the market—that'll probably go on for a couple of years, and then we'll start the cycle over again."

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