Will hosting bankers follow the deal flow?

Contact: Ben Kolada

Acquisitions in the hosting and colocation sector, which dominated headlines in the first half of last year, have flatlined. Gone are the days of multiple nine- and 10-figure deals being done by telcos and buyout shops. PEER 1 Hosting’s NetBenefit acquisition, announced Wednesday, was welcome news for M&A advisers serving the hosting industry (particularly for Oakley Capital Corporate Finance, which banked NetBenefit), but as deal volume in the industry slows, some bankers are making the move to the SaaS sector.

Although valuations remain strong (PEER 1’s NetBenefit buy was done for 10 times EBITDA), deal sizes have shrunk. The median deal size so far this year is $34m, compared with about $50m in the year-ago period. Further, deal volume has flatlined. Annualizing year-to-date deal flow would mean that annual volume has plateaued from its peak in 2010. Volume may ultimately rise as private equity firms that announced hosting plays in the past few years look to exit those investments, and as US firms look overseas for deals. But investment bankers serving this industry aren’t content to wait.

While hosting bankers aren’t yet giving up on their core industry, some are already transitioning to targeting the SaaS sector. For example, one of the hosting industry’s front-running investment banks, DH Capital, recently partnered with SaaS Capital, a specialized commercial lender serving the SaaS sector. They recently worked together with existing investors to secure $12m in subordinated debt financing for SaaS security firm Alert Logic.

More hosting-focused investment banks may look to make this move as well, since the leap from hosting to SaaS banking is shorter than many would think. Hosting and SaaS businesses have similar operating models, such as recurring revenue and server-centric, hosted products. One more reason for the transition: the number of SaaS transactions is twice that of hosting acquisitions.

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