Like a hired gun I am only as good as my last assignment. I closed a deal this week where I am actually permitted to release hard information (most of our transactions are private and confidential). 8×8 Inc. (Nasdaq:EGHT) acquired Central Host. I think you will find the trends, metrics and insights interesting and telling about the market.
The Seller the Strategy: My company, NCC, represented Central Host, a high touch managed hosting firm, in the transaction. We actually started working with the owner, Andrew Schwabecher about three years ago. Andy listed his company for sale, but after working with him we agreed on a strategy that would delay the pay off. His revenue base was just a bit off for him to get a great valuation and more importantly realize certain personal goals. In the end we wanted to double his revenues and lower his average rate. Over the next two years the average revenue dropped from $4,000 per month to just over $2,000. His firm was no longer relying on a few large Fortune 500 accounts. Revenues almost doubled. It was a stronger story. He met both strategic goals.
The Transaction: A couple of weeks ago I wrote a blog about the TDS/VISI transaction. That is where a telephone company purchased a managed/cloud hosting firm. The jest of the blog was that it provided TDS with additional services it could market to its base of 750,000 customers which includes a large base of SMBs. Managed hosting acts as glue, has higher margins, achieves economies of scale and is not PUC regulated. It is a great strategy.
Guess what? 8×8 is a VOIP telephone firm. They have 20,000 SMBs. Central Host is a pure managed hosting firm. Sounds like the VISI/TDS deal? You see the trend.
Valuation Metrics: 8×8 purchased Central for 1.44 to 1.6 X annual revenues (I won’t go into the accounting variation, believe me) – OK read the press release or SEC docs. As recently as December it was often stated that dedicated and managed hosting firms were in the .75 X range. Personally I thought that valuation was light. This deal is much closer to the 2X TDS/VISI deal. It looks like the market is going in a good direction.
The timing: On March 2nd we officially put Central Host one the market, prospective buyers received a 43 page confidential memorandum. There was quite a bit of interest. 8×8 made a pre-emptive and acceptable offer. On Saturday evening May 1, Andrew had dinner at the home of Bryan Martin, CEO of 8×8. After dinner and over a bottle zin the gentlemen signed the purchase agreement, their children played and wives got to know each other.
The following Monday, Andy arrived at his “first real job” in a number of years. The 200 8×8 employees, marketing, outside sales, customer service, PR, operations aggressively integrating Central Host as an integral part of 8×8’s battle plan, a plan headed by Andrew the “General Manager of Managed Hosting and Cloud-Based Computing at 8×8, Inc.”. He told me he was impressed with the organization, I know he is up to the charge.
It looks like the deal took 60 days, but it is the fruition of a three-year strategy. I’ve closed a lot of deals, some 300 assignments notched in the belt. I like this transaction.
Later – Tom
Oh M&A — attend my presentation on Cloud Valuations at HostingCon Monday 3 PM
More about Tom: NCC International – the Hosting Business Broker Twitter: TomNCC and NCC WebHostBusiness
About Tom Millitzer
I am an M&A guy. I sell Hosting Companies. I want you to fulfill your dreams. If you are building your company or exiting for success...I want help you grow rich.
I started NCC International in 1994, we represented our first hosting company in 1997. NCC has completed over 400 assignments. If you are considering buying or selling you need to know me. I do not bite.
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Thanks a bunch for the info. Have a great day.
Thank you for posting this. This really gives me good info about the business.