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Having completed the sale of Ardenta, primarily a managed hosting services company, to Claranet (see ardenta-claranet) we thought this a good time to reflect on market activity in and around this sector and provide some insight to valuations of such businesses and what makes them a desirable acquisition target. Specifically, we focus on businesses which will are likely to be valued between five and twenty million pounds for that is in this range where WTA has most experience acting for clients. Different valuation metrics might apply to larger businesses.
First there is not likely ever to be a pure hosting company. The business is likely to offer a number of related services such as managed support, infrastructure and consultancy to name but a few. This is necessary to either offer customers the range of services they require but can also be a result of transitioning the business from say, an infrastructure company to one providing more added-value services. The appeal and value to a Buyer will depend on the exact makeup and size of the different components and revenue streams of each service offered.
The sector is very active and this is evidenced by numerous recent transactions including Datapipe’s acquisition of Adapt, Pulsant’s of Onyx, Six Degrees Group’s buying of Insite, Claranet purchasing Bashton (along with Ardenta soon after), Pinnacle taking over Adept4 and numerous others. Why should this be so? There are always the generic reasons to obtain efficiency of scale and to become more competitive by offering a wider range of services but there are a number of other drivers: B2B moving to the Cloud is seen by customers as being significantly more flexible in how technology is delivered to their customers and end-users. Cloud hosting provides reliance and a solution for Business Continuity and Disaster Recovery when on premise services are not accessible. Another is the considerable saving to the end customer of capital resources and overcoming resource shortages. By using a Cloud solution, the customer removes the need to having to ensure the latest software is obtained and integrated. Customers are also uncertain how their companies will evolve over a number of years and Cloud solutions allow to scale up and down. These and many others create an opportunity more ambitious service providers with access to funding to compete for and win a sizable portion of this new business and to do that they need scale and capability and they can obtain that most efficiently and in the shortest possible time by making acquisitions.
How should owners look at the potential worth of their business? A health warning; each company must be carefully and individually valued as many other factors affect valuation such as quality of and sector of customers, strength of management and quality of earnings are just some. Guidelines, provided here are indicative only but do assume a good quality of transaction i.e. all or nearly all consideration paid in cash on completion:
In conclusion we see the Hosting and Cloud Services sector as being one of the more in-demand places to be with considerable market interest aroused when we offer such companies. We always expect to see competition and choice resulting for the buyer and price expectations being met and exceeded.