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THE CN INTERVIEW: John Hassett of Radius Capital
The CN Interview with John Hassett of Radius Capital
29 December, 2005
2005 witnessed a number of transactions and joint ventures that caught everyone’s attention in the conferencing industry. These included the unique acquisition by West of the Sprint conferencing business, the effective buyout of Act Teleconferencing, the acquisition of Centra Software, the acquisitions of Citizen Conferencing and Netspoke by Premier Global, WebEx’s acquisition of Intranet.com, plus a whole bunch of smaller transaction involving resellers and small assets like the purchase by Raindance of BCE.
We thought we should check in with our favorite M&A guy, John Hassett, of Radius Capital in Boston to get his perspective on this year and what to expect in 2006 on the finance and M&A front. As you might recall, John was the founder of Multilink back in the ‘80s, and the founder of the conferencing industry’s first roll-up, Vialog, which acquired nine conferencing companies in the late ‘90s then went public and eventually merged with Genesys. Since 2002, Radius has been very active as an investment banker for selling-firms including ConferenceCall.com, RCI, CCS and Intelligent Meetings. Radius currently represents three conferencing firms now on the market. Radius was also, reputedly, the alternative bidder to West on the Sprint deal (but John won’t talk about that) and they made a run at buying Genesys three or so years ago (he won’t talk about that either).
We spoke to John last week by phone and here is what he had to say.
Conferencing News: Was 2005 a big year for M&A in our industry and did it produce any trends?
John Hassett: I think 2005 was in line with the general market in terms of M&A; very active, but not over the top like in the late ‘90s. In terms of trends, the continued erosion of price in all elements of the collaboration business - audio, video, web, streaming – has had an impact on profit multiples, but profitability remains high thanks to automation and reduced costs, so sellers are still getting a good multiple on revenues.
CN: What about profits? Where should they be and who is doing it right?
JH: We know a number of small companies that are doing upwards of 50% EBITDA and the well run bigger firms are producing EBITDA in the 35% range. If you want to know who is doing it right, just look for 35% EBITDA or better. The few analysts who cover this space haven’t really figured out how to measure success in this industry and what metrics they should watch. The key is in well-managed SG&A, and the metric to watch is revenue divided by billing units. You can watch price erosion and compare companies with this metric and SG&A is the best measure of management efficiency.
CN: What are valuations now and what do you see for 2006?
JH: It obviously depends on the segment of the business first. VoIP was hot in 2005 obviously (Skype, etc), so valuations in that segment were rather generous to put it lightly, but we expect that to cool as fast as it heated up, perhaps a 50% drop in 2006. Web is undergoing a real devaluation right now and we expect that trend to continue in 2006, and by 2008 to be almost commodity in nature, right there with audio.
CN: What about audio conferencing valuations?
JH: It was 6X EBITDA in the late ‘90’s, 5X in the ’02 time frame, 4X in 2005, and I expect it will stay around 4X for most of 2006. But because profitability remains strong in this segment, the multiple on revenues has hung in there for several years at 1.5X or so. Interestingly, the public companies in this space are also valued at between 1X and 1.5 X revenues themselves. The resellers are getting killed though, small transactions in this area, are being done at .5X sales in that subset of audio.
CN: So what will 2006 bring? More or less M&A activity?
JH: I think that there will be a notable amount of finance activity in 2006 and some M&A, but the acquirers are kind of bloated right now, having gobbled up a lot of revenues in the last couple years, and there just aren’t that many good companies left outside of this last consolidation. There’s a couple, but not enough to make for a bang-up year in M&A.
CN: Any predictions?
JH: The big fish have had about enough of the little fish, so activity there is going to be somewhat anemic. I think the big fish will start eating each other next year though, or at least a couple of the medium fish will get eaten. So look for one or more larger transaction that consolidates the top of the food chain.
CN: So will you all be buyers again in the dusk of this latest round of activity?
JH: We’re happy representing the quality firms we currently represent and don’t see any reason to change our business model at this late stage. There might be enough left for a small roll-up that has lots of value, but I think the activity around the few good businesses left will result in a rapid depletion of inventory, so to speak.
Thanks, John. Good luck with Radius Capital in 2006.
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