The first thing to do is to update the accounting records and in line with that ensuring all outstanding debt is collected from nonpaying clients. In case they fail to pay, their service accounts should be suspended. For continuity, it is imperative to reconcile the inventory, compile information on business assets, contracts and agreements with suppliers, client domains associated with the business, servers and licenses. After these prerequisites, document all the operational functions that will help the new owner understand the running of the business in the shortest time. These include passwords, warranties for equipment and lists of services and clients. You are now ready to sell your internet hosting business by highlighting its strong points and documenting all the positives that will woo potential buyers. In such a high stakes business, it is wise to ensure the firm responsible with closing the deal has capacity to take over all administrative and technical support issues affecting your clients during the transition. DealCapital is one such firm you can partner with.

Your software investment bank will help you determine the asking price for your internet hosting business based on the valuation and profit margin. They will then post multiple confidential advertisements for the sale of the business on media that do not require disclosure of the business name. Selling an internet hosting business is sensitive and clients can potentially panic due to uncertainty. During the sale, go for a buyer who is more likely to be perceived by your clients to foster continuity, have their interest at heart. Sometimes this may not be the highest bidder. Post-sale support is just as important to guarantee clients the transition will not affect service provision.

While we enjoy selling companies that have inherent value in the cash they are throwing off on a regular basis, we also love to catch waves, ride them and sell at the top, especially for those working in industries of high growth and huge potential.

The cloud sector is a current industry with huge potential and a great deal of hype, but fortunately for those who’ve created excellent businesses within this growing field the numbers speak for themselves. After pulling some data from several market research reports, here is some information on the cloud computing M&A and the industry at large:

• Public cloud expected to rise from 28% to 51% over three years until 2015
• Public cloud workloads may increase at 50% CAGR until 2015
• Best positioned for cloud adoption: Accenture, Salesforce.com, Broadcom, EMC, Juniper Networks, Quanta, Rackspace, and VMware. These companies make for great acquirers of smaller, but proven players in the cloud
• Newer, less developed cloud markets will see higher growth, including IaaS and PaaS markets.
• 20% CAGR in virtualized servers
• Current PaaS and IaaS usage is at around %15 of total while the more common SaaS is near 20%
• Strongest growth is expected in the IaaS market at 54% CAGR until 2015
• Rackspace’s cloud business is expected to have a 46% CAGR over the same forecasted time frame
• Industry analyst groups Gartner, IDC and 451 expect a more conservative 25% CAGR over the same time period. MS differences were garnered from surveys of expectation for growth of workload performed in the cloud (29%) and workloads performed overall (16%)
• Current on and off premise virtualization is expected to grow from its current level of 32% of total to 52% over the next three years
• A 17% improvement in utilization of virtualized servers is expected to take place over the next three years
• According to IDC growth of unstructured (undefined) data will account for 89% of the 48% annual data growth rate (example of structured data: databases)
• Structured data is expected to grow at 58% CAGR and unstructured data is expected to grow at 21% CAGR
• Large storage shift from scale-up to scale-out SAN and NAS technologies including EMC’s V-Max (SAN), EMC’s Isilon (NAS), and EMC’s Atmos and NetApp’s Bycast (object storage) giving EMC an upper hand in their ability to dominate in unstructured storage
• MS expects that unstructured data could account for more than 80% of total public and private server capacity by 2014
• IDC estimates unstructured data storage in the public cloud and content depot environments will account for approximately 95% of capacity by 2014
• Cisco’s USC platform for data storage is estimated to have margins of about 36%
• EMC (five year storage market share increases from 21% to 26%) and NetApp (five year storage market share increases from 6.3% to 11%) are expected to grow and continue to take share
• AT&T is expected to grow inorganically in the IaaS space through M&A
• 12%, 20%, 15% and 12% surveyed CIOs expect to provision new IaaS workloads with Rackspace,  Amazon, AT&T and Verizon/Terremark respectively
• However, Rackspace is expected to be the best positioned to compete in the IaaS market and MS expects 40% EBITDA growth through 2012
• 30% to 35% of total cloud revenues are expected to come from large IT organizations
• Forrester expects total public cloud to reach $160 billion
• Deloitte pegs the current SaaS market as 89% of the total market
• It is expected that PaaS and IaaS have a robust growth rate of up to 50% over the next several years
• Gartner: IaaS revenue was $969 million in 2008 and is expected to increase to more than $8 billion by 2013 (CAGR of 53.6%)
• IaaS is expected to be about 31% of the total cloud market

I don’t have to tell you that growth is somewhat eminent here. However, so much of the success in any high tech endeavor is about execution, timing and knowing the right people. Fortunately, we’ve the expertise at all three, especially in the realm of software mergers. Contact us to find out more about selling your cloud-based business.

The upside is this: 10,000 baby boomers are expected to retire each day for the next 19 years. The downside: 10,000 baby boomers are retiring daily. On the positive side of the equation we see approximately 300K baby boomers making their exit from the workforce monthly. This astounding number of eventual retirees caries with it one of the largest transfers of wealth in the history of mankind. Many of these individuals own and manage successful middle market businesses with plenty of profits to go around. In other words, those who have prepared themselves for the coming shift in assets and wealth will prove extremely helpful at transitioning between the generations. However, there are so many other cogs in the scenario which need addressed it’s frightening.

Take for instance the fact that most boomers have less than $50,000 saved for their retirements. This means the majority of people will be highly dependent on Uncle Sam to fund their retirement. The difficult piece of this puzzle is the explosion of entitlement spending that is about to take place, something completely correlated with the mass exodus from the job market. Here are some additional alarming statistics put together by the Congressional Budget Office:

• Without entitlement reform federal spending will exceed 40% of the economy by 2050
• Deficit spending for entitlements, including Medicare and Medicaid began in 2010. It only gets worse as the backlog of retirees begins
• Medicare is currently the biggest vacuum for federal spending and its growing at an alarming rate
• Without intervention by 2045, tax revenues will be fully eclipsed by Medicare and Medicaid alone
• Entitle spending is expected to double by 2050
• Tax increases on the wealthy will not solve the issue
• Tax rates on all Americans will need to double in order to simply cover the expected costs of the debacle

What does this mean for the investment banking industry? My prediction is that the middle market multiples will be even more suppressed than we have seen them previously. Valuations of middle market companies will be much lower than their larger S&P traded counterparts due in part to customers’ willingness or ability to pay. Higher expected taxes reduces the excess cash on hand for small firms to reinvest and expand their business via acquisition. Sellers will be more likely to sell at discounts to ensure that at least they are able to get something out of their baby and have at least a semi-comfortable retirement. Deal terms could most likely favor strategic buyers even more, especially if they have money. Individual buyers will probably also gain a little more negotiating power than they have had in the past as well.

We’ll most likely also see a shift in the way businesses are perceived as well, which could further impact valuations and most likely in a negative way. With the uncertainties looming large in the not-to-distant future, the options seem bleak at least for some. We can be confident and highly bullish of the fact that there are still businesses that need to be sold and the coming years will see a huge shift in the volume and need for such services.

I ran some numbers earlier this year after looking at some of the recently filed SEC documentation. Depending on the assumptions one makes about growth, attrition and the revenue recognition per customer, the company may not be too far off it’s mark. The range is anywhere from $50 billion to over $110, depending on the assumptions one makes. If you do it based on comparable companies and are highly risk averse–removing outliers–it appears Facebook hits at about $50 billion.

Based on the analysis, I would  expect the Facebook IPO share price to be at or near $16 per share. This gives Facebook a valuation of around $30 billion assuming there are 1873 million outstanding shares.

In calculating the underlying value of the shares issued in the initial public offering of Facebook, I considered a number of potentially comparable firms, including online technology, retail and web advertising firms. The comparable firms were considered for their business type and were compared using numerous figures of merit. Our discussion also considered Facebook’s potential for growth in
comparison to recent similar IPOs such as LinkedIn and Zynga. I compared current revenue per customer (registered user) for Facebook vis-à-vis the more nascent comparable companies and those more established who’ve had considerable more time to extract value from active users.

This discussion proved most interesting as I noted the recent high valuations for Zynga and LinkedIn whose businesses most closely resemble that of Facebook. If analysts and investors expect Facebook to add more users and, more importantly, extract more value from existing users over time, then more weight would go toward the Zynga or LinkedIn IPOs as valid comparables as they would be more reflective of a continued high-growth trajectory. But, I considered LinkedIn and Zynga as overvalued and as outliers for many of our multiples.

Finally, I decided to choose the following comparable companies categorized according to different factors:

1. Display Ad business and online marketing services: Google, Yahoo, AOL, Microsoft, Disney,
LinkedIn and ValueClick
2. E-commerce business and payments business: Zynga, Amazon and eBay.

While I considered several traditional quantitative and qualitative units of merit in our assumptions analysis, I also took into account some non-traditional qualitative comparisons which included Price/Sales, Enterprise Value/User and Enterprise Value/Employee. These helped us to see and compare the value drivers for Facebook, but also indicated that, while there are many similarities, there is no such thing as a perfect comparable firm. As such, I chose to weight the comparable multiples according to both qualitative and quantitative qualities, which I felt gave us a more rounded indicative view of the underlying value of the company.

Applying multiple to Facebook’s numbers, I came with a range of IPO share prices. I believe the price range around $16 is more accurate and a better representation of Facebook’s business. But, to be fair, I’m biased toward conservatism on these things and this has the panache and smell of a large deal. Hence, I’m sure with the IPO “pop” we could see the unthinking $100+ billion.

The Target

From the target’s perspective, the show must go on. They will do anything within their power to make sure the deal is pushed through. The author cites a famous case in which Dow Chemical was forced into the acquisition of Rohm and Haas right in the middle of the financial crisis at a valuation that was paltry to what was initially anticipated, based on the sink hole that was the entirety of the market at the time. This is the ideal opportunity for a target company to have: no downside risk. If you read the details of the Rohm and Haas acquisition, executives stood to profit handsomely from the deal and had all the more incentive to push it through.

Unfortunately, this is more of the exception rather than the rule. If a deal goes sour, and they sometimes will, then termination fees are paid and acquiring companies often will take a hike. In anticipation of such a blow, many companies have forced increases in the once standard 3% termination fees, now requiring even higher 4% and even up to 8% for a potential break-up.

The Acquirer

What the buyer wants is often highly dependent on the type of buyer you are dealing with. A private equity firm will be less likely to negotiate. In the event the deal goes south with a more strategic acquirer, there are often other options. In the case of a PEG, they may use all the chips it has to secure an exit from the deal completely, especially if the “adverse change” is highly adverse.

The first step in this process is to use the MAC claim. When this occurs the acquiring company may not necessarily want out of the deal, but it usually signals the start of negotiations which could amount any number of options including: renegotiated terms of the termination fee (or if there is really a need for a termination fee based on a MAC) or renegotiated corporate valuations.

In any event, the small nuances at the outset of any deal can have very large percolating consequences, especially with the current volatility of things. Uncertainly breeds fear and fear may make anyone want to run as fast as they can away from a bad thing. This may be one reason to work to ensure your company has steady cash flow coming in and a very viable future before it gets shopped around, especially to private equity firms.

Quarter Transactions EBITDA*
Multiple
Q1 2008 23 5.6
Q2 2008 34 5.6
Q3 2008 35 6.2
Q4 2008 31 5.9
Q1 2009 15 6.2
Q2 2009 16 6.5
Q3 2009 20 5.1
Q4 2009 20 5.4
Q1 2010 17 5.2
Q2 2010 30 5.5
Q3 2010 42 6.1
Q4 2010 58 6.1

This may be a story of the big get bigger and the small get, well, they get what’s left over. However, our numbers may be a bit skewed given the fact that many strategic public buyers were excluded from the data.

But, we should also pay attention to what is going on in the numbers. First, the overall number of deals that occurred dropped during the recession. This is, of course, no surprise. During the first half of 2009, the better your company was, the higher the multiple you were able to glean, otherwise, you would have probably been dead in the water. It is not too far flung to recognize that business buyerswill run to quality over quantity when things get bad. Late 2010 data indicate a potential recovery. Now, let’s take a look at the median multiples for companies under $1 million in enterprise value.

Multiple EBIT**
Multiple EBITDA
multiple
2003 0.48 3.52 3.80
2004 0.50 3.45 3.80
2005 0.48 3.27 4.05
2006 0.50 3.53 4.16
2007 0.49 3.11 3.73
2008 0.48 2.35 2.60
2009 0.45 2.32 2.31
2010 0.45 2.13 2.10
Median Multiples for Companies with Enterprise Value Between $1 Million and $5 Million

Year Revenue
Multiple EBIT**
Multiple EBITDA
multiple
2003 0.40 7.13 7.16
2004 0.43 5.57 5.49
2005 0.42 5.38 5.72
2006 0.41 5.42 5.53
2007 0.45 5.16 5.41
2008 0.40 4.58 4.29
2009 0.41 4.08 4.18
2010 0.40 3.39 3.31
**EBIT = Earnings Before interest and Income Tax

These numbers indicate no real sign of the recovery of pre-recession multiple values. Take a look for instance, at the numbers: decreases in multiples of almost 50% since pre-recession levels. This is a bit discouraging for those who may be looking to retire with some type of liquidity event. However, the Main Street firms are making out like bandits. If your company really has a great reason to believe, now may be the time, otherwise, holding out could be a good idea. That is an honest opinion, even though many in the industry make their livings off the kill from deal flow.

“[LBO funds earn returns] on fees, fees, fees. They invariably auction the business and are looking for strategic buyers. A strategic buyer is just someone who pays too much.“ –Warren Buffet [Emphasis added]

“Some buyout firms ply rape-and-pillage tactics.” -Forbes, 13 March 2006

“Private equity firms are a burden to the economy, to the community and a burden to the company and the employees.”

- Paul Maloney, Senior Organizer of UK union GMB

Now, that we have some peoples’ opinion on how LBOs are actually value destroying here are some results from a forthcoming paper by Harford and Kolasinski, stating that refutes the aforementioned statements. According to the paper, written by two B-school profs. at the University of Washington, LBO firms which were eventually sold to a strategic buyer actually create value. In addition, work by Cao and Learner support the same findings: LBOs really do add value and are not necessarily the result of “rape and pillage tactics.”

Here are some of the results:

LBO targets taken public again in IPO’s generally outperform benchmarks in three years post-IPO (Cao & Learner, 2008) LBO targets sold to public strategic buyers see the buyer’s stock price go up upon acquisition announcement and there is no evidence of long-run underperformance after the acquisition has taken place (Harford & Kolasinski, 2010).

In instances when the LBO target is owned by a PE fund CAPX tends to decline (but CAPX is generally less sensitive to losses for LBO targets than for public control companies. In addition, there is a seen an improved ROA after the LBO has taken place (generally amounting to about 2%). Bankruptcy rate is also considerably low (hovering around ~15% or so). Finally, bankruptcy is generally unrelated to special dividends (Harford & Kolasinski, 2010).

So despite popular anti-LBO opinion, they can not only serve a purpose, but can also add value to organizations who engage in them. Perhaps it is our negative view on debt which turns us off to them. Or maybe it has something to do with the type of people who tend to engage in the — at least the stereotypes of those types of people. Or maybe it has something to do with what we are choosing to believe beyond the facts. I myself tend to believe that it is not the LBO that is adding the value itself, but the management put in place during the time an LBO takes place that adds the value. Or, the businesses just makes sense to someone who is able to see something that others do not–the diamond in the rough, so to speak. Whatever the case may be, LBOs certainly do have their place. Please let us know your opinion. Do LBOs add value or not?

Here is how a leveraged buyout will generally go down (in the simplest terminology possible):

1. A company is purchased using an inordinate amount of debt.

2. The holding company(many times a private equity group) will hold the company for for a limited period of time.

3. Sometimes cash is taken out prior to selling.

4. In 3 to seven years you hopefully will sell for a massive return (IPO or an M&A exit) and reap the rewards of a great return.

Who are some of the more well-known companies who have engaged in such transactions? Bain Capital (Mitt Romney’s little babe), KKR, Cerberus, Texas Group and even Berkshire Hathaway has engaged in them (yes, they are more than a buyout fund).

Ah, yes, but how do LBOs add value? This is a fairly controversial question, especially among academics, but tax shields play a huge factor in the value created through leveraged buyouts. The practitioners themselves will claim LBOs help in the following ways:

• An LBO promotes debt disciplines for managers which forces cost cutting within the organization (RJR Nabisco anyone?)
• They can give companies better access to capital
• When the firm is not public, it gives more short-term access to potential necessary capital
• Assuming the PEG (private equity group) or purchasing entity holds better management expertise than the selling company, then expertise can help turn the company around, producing greater profits when the company is later sold.

And what types of firms are generally the type of candidate that would fit an LBO? Mature and declining industries with low growth and steady cash flows who are in need of necessary cost discipline implementation. In some cases, leverage can also help in bargaining with unions, but this particular benefit has never worked with Chrysler.

This will be the first in a series of posts surrounding LBOs. Please check back later for more information.

The head of the PMI team works to maximize the speed of project integration and works to ensure the deal goes through as quickly as possible. The aspect of mergers which can be inefficient and capital destructive generally has to do with personnel management which usually has to do with lack of speed. The PMI manager works to ensure speed happens much more rapidly.

• Ramp up planning efforts
• Accelerate implementation in general
• Push for decisions and actions
• Monitor progress against goals and pace the integration efforts to meet deadlines

Create Structure

Have you ever hear of Microsoft Project Manager? This is where it is used. Setting up guideposts and goals and then working through the necessary processes to see it through is part of creating and maintaining structure throughout the process.

• Provide flexible integration frameworks
• Mobilize joint teams
• Create key events and timelines
• Facilitate team and executive reviews

Make Social Connections

Because personnel management is so crucial to efficiency and getting things back on track, managing the social aspects of the deal can be extremely important. In fact, lending a listening ear is probably one of the most important aspects of this part of deal management.

• Act as traveling ambassador between locations and businesses
• Serve as a lightning rod for hot issues; allow employees to vent
• Interpret the customs, language and cultures of both companies

Engineer Success

Recognizing synergies is difficult. Because the PMI team is responsible for determining synergies and eventually recognizing them, making sure they are implemented is difficult. The onus falls upon project integration members to make sure this happens rapidly.

• Help identify and exploit critical business synergies
• Launch 100-day projects to achieve short-term, bottom-line results
• Orchestrate transfers of best practices between companies

*Much of the specific information from this post comes to you from the Harvard Business Review, 2000

Don’t Always Sell

I know it is tempting to have every post you craft act as a sales pitch, but people rarely read that stuff. They may find it through a search online, but they are rarely going to read through a bunch of posts that are all about how cool your company is.

Another problem with always using your blog to sell yourself or your products or services is that your company will always look very one-sided and self-serving. People don’t like that on the web. Google has always prided itself on returning results that people actually want to read, not some junk content that is a ramble about how cool your company is and how many years you have been doing what you have doing.

In addition, the most salesman-like blog posts out there today usually end with an entire paragraph which is nothing more than a blatant sales pitch. If people have gotten that far in your blog (which most of them probably have not because a “lighter” version of the pitch was infiltrated throughout), they will most likely move on from there, not reading anything else. If in fact your post did have interesting content before that, I’m sure the person visiting may click through some other portions of your site to get see all about who you are and what you do.

Give Advice Sparingly

Much like the aforementioned issue that comes from selling too much, giving advice too much can be exhausting as well (just like this post itself—is it nothing more than giving adviceJ ) When you do give advice-filled posts, just make sure they are not the only posts you are writing. Here are some other topics that are interesting to readers and the search engines:

• Industry buzz
• Industry news
• Personal stuff, people often like to read and hear things from the heart

How to get traffic, but get hated

Getting traffic is not to difficult on the internet as long as you are okay with being hated; that’s right hated. The way to get large amounts of traffic to your blog is this: talk about specific people or organizations in a negative way. Be an industry critic. Blog about some scandal with the latest CEO of XYZ corp and be scathing in your remarks. The meaner you are the better. This is how to get massive amounts of traffic very quickly. How do you think sites like the Huffington Post get so much traffic? Of course, in our industry, it is wildly important to be as professional as possible. Investment bankers have been getting a very bad rap for the last few years. Keeping it gentlemanly and professional is your best bet in this type of an industry. At least it has been in the past. I’m sure sometime in the future, we will see some punk author who wishes to get his/her name out there write something to get some quick traffic and a name (albeit negative) for him/herself.

So there you have it. There are a literally hundreds of posts just like this, but after reading some industry blogs lately, I thought this would be an enlightening post for some who may not have been as used to blogging as I. There I go, breaking my cardinal rule of giving advice. Happy blogging!