Fixed Wireless Business

Banking on WISP Acquisitions — continued

Activity
Despite aggressive players like ERF, Millitzer would not characterize the current consolidation as "intense." "I don't feel like it's big railroad train going down the track," he says.

The recent up-tick in activity, he adds, may have more to do with supply than demand. Of the hundreds of small-town WISPs started by entrepreneurs in the last five to ten years, it just happens that many are now coming to maturity.

"It doesn't make any sense [for a company like NextPhase or ERF] to do an acquisition unless the [target] is a certain size, and it takes time to get that big," Millitzer says. "They won't buy a company with 50 subscribers but they will buy one with 300 or 400. Many are getting to a size now to be acquired."

Cubley's explanation of the current flurry is only slightly different.

"You've got to look at who the sellers are," he says. "Usually they're local people who saw an opportunity, put their savings into it and built a business."

But many have now reached the limits of their growth and are faced with a hard choice. Either they find new funding and acquire nearby competitors to get bigger, or they sell. Many opt for selling.

Some are in financial distress, but ERF typically isn't looking for fire sale goods, Cubley says. "We're mainly looking for those with $1 million or more in revenues that are either profitable or near profitable."

Given the supply side factors in the ongoing consolidation, it's not really a seller's market, Cubley claims. He says he expects to pay about one times a company's annual revenue to acquire it, sometimes as little as .5 times revenues. He figures it would cost about 1.5 times revenue to grow a customer base through sales and marketing.

Which would make WISPs a bargain indeed.

Millitzer tells a slightly different story about market values. There may be a perception that there are bargains available, but buyers usually get what they pay for, he warns. The apparent bargains, for example, may be very inefficient because badly managed, or margins may be lower, or equipment is old and needs replacing.

A fair price for a good company, he says, is about four to six times EBITDA—earnings before interest, taxes, depreciation and amortization.

I'm no financial expert, but that still sounds like considerably more than Cubley's estimate of the going price. My guess? Cubley, always a buyer, and Millitzer, who only represents sellers, are engaging in a little extracurricular negotiation by media. The reality may be somewhere in between.

No pain, no gain
Even if there are real bargains for WISP buyers, there are some post-sale costs and challenges. ERF has to carefully integrate each new acquisition. It typically lets the company operate under its original name at first, gradually retiring the old branding and replacing it with ERF's over the first year or so.

On the human resources side, the transition can rarely be done without some bloodletting. ERF generally eliminates staff that performed administrative tasks such as accounting that are done centrally for the entire company at headquarters.

And while many entrepreneur managers want to retire or move on anyway, some senior managers in acquired companies may end up getting the sack, especially when ERF buys companies adjacent to areas where it already has operations. In those situations, it keeps the "best" people as regional managers, Cubley says. The others: heave-ho.

Technology integration is another challenge. ERF won't even consider acquiring companies that use some kinds of wireless infrastructure equipment. But it still has to deal with as many as five to seven different vendors, the two biggest being Motorola and Trango.

"We cross-train our service technicians and customer service personnel on everything we're running," Cubley says. "They have to be proficient in all the technologies. But radios all have similar characteristics."

One interesting question. If ERF's strategy is to acquire WISPs to get field technicians and customer service personnel on the ground in areas where it has bank customers, does that mean it won't invest to grow the broadband wireless business? Cubley won't come right out and say so, but that's what it sounds like, at least in some cases.

"If [a new acquisition] makes money and adds to the overall profit of the company, we're going to invest in it," he says. "But we're not going to put money in to subsidize [unprofitable operations]."

—End

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