Possibly you have read one of my dissertations regarding EBITDA – including the various forms of prounciation. As a refresher you will also note that I prefer the term “Cash before DAIT” because it places the emphasis on “CASH” – which in the end is the purpose of one of your Web Hosting acquistition exercises. That is the cash on hand to pay for stuff after the transaction, not including operating costs.
In looking at your friend Cash Before DAIT, the buyer looks at how much cash is available, typically for debt service and capital expenditures, extra cash is always suggested. In otherwords, how you are going to pay for your hosting acquisition.
Reviewing this weeks $333 million Windstream acquisition of D&E Communications I noticed the deal was stated in OIBDA, thanks I said. I don’t toss this around often, OK never do, but I like it.
Lets look why:
OIBDA “Operating Income Before Depreciation And Amortization” does not include non-operating income. For your general calculation you will use—
OIBDA = Operating Income+Depreciation+Amoritization+Interest
For a great example I suggust you review the clickable Windstream graphic.
You will note that the calculation is started with GAAP net operating income vs. EBITDA which is stated with GAAP net income.
Now you can see why I like it (Even though they left off the “T”, who pays taxes anyway?), I believe you will agree that it is a better representation of the deal especially for “RECCURING CASH FLOW” based business like Web Hosting, which is why Windstream used it in it’s presentation. And, it is one of those things in life I was actually doing in my presentations, but no one told me.
I know you want the easy understandable version, so do I. So accountants please do not criticize or generally get in the way, this is an operational and acquisition discussion. Technically this stuff should occur near the bottom of the Operating Statement (P&L).
Between the “O” line and the “E” line there are items that you may want to exclude or include in my (Tom’s) “CASH” calculation.
You note that hidden in the CASH other things may be considered (hence OBIDA), they should be between the O and the E lines (unless different terms are used) or if not hidden elsewhere, usually you are looking for items that are not recurring every year.
Here are some suggestions if you were initially buying a Company that previously had $10 million in “CASH”.
• Your are buying a Hosting Company but it sold off $1m of old servers, don’t count that.
• You are buying a Web Hosting Company that sold off a “shared hosting” division and profited $1m from the sale, don’t count that either (and you will have many other calculations to look at).
Now you have $9 million of “CASH” that you can use.
In other words you are looking at things you cannot anticipate ever happening again or does not apply. Personally I think we should all just term this as “Tom’s CASH” or the CASH you can count on.
I will caution you however, not all these things are in practice stated near the bottom of the operating statement. They should but they don’t. For example you may find those server sales are hidden in the revenues lines, way at the top and not between the “O and E”. Conversely you may find “restructuring expenses” (management screw-ups), hidden somewhere in the expenses above that “O” line, buts that’s a different story.
For practical purposes, I suggest that if your company is nearing $5 million in revenues you considered audited financial statement that should clear up your possible GAAP faux pas.
The bottom line. Do your due-diligence, tear apart the operating statements so they make sense to your and your business. I know you would do that anyway. Make up your own version of “Tom’s CASH”
In conclusion:
For us valuation buffs Windstar acquired D&E for exactly 5X OBIDA
Suggested OBIDA pronunciations:
“OOO BID A” With a decidely German accent twist.
“O BGIDA” Like Bogotá Columbia on October 31st.
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