Cogent exploring M&A opportunities, but pricing and returns aren't right

Cogent isn’t afraid of making acquisitions if they can add scale or value to its business model, but the price and returns on capital have to be right, according to its CEO.  

Dave Schaeffer, CEO and founder of Cogent, told investors during the Deutsche Bank 24th Annual Leveraged Finance Conference that while it looked at over 500 acquisition targets, none of them fit their requirements.

“In 11 years, Cogent has looked at 525 additional acquisition opportunities and has done due diligence on those targets and has not done a single target,” Schaeffer said. “There are three reasons why: we don’t need physical assets; we’re comfortable with the scale we have and we’re not comfortable to pay a premium for scale; and most importantly, valuations are unrealistic.”

In considering these acquisition targets, Cogent set a 6 percent risk adjusted risk adjusted return on capital.

“In looking at growth businesses we were basically trying to understand how long that growth would continue and looking at flat or declining businesses what that rate of decline would be,” Schaeffer said. “Even when factoring in potential synergies, we could not find a single target that fit that threshold so we have not done a deal in 11 years.”

Schaeffer added that Cogent is always looking at other opportunities. This includes two types of targets: those companies that have a growth trajectory trade at relatively high EBIDTA multiples and more traditional telecom assets that aren’t for sale for a reasonable price.

“Against that backdrop we have continued to look, but we have not done anything,” Schaeffer said.

That’s not to say Cogent will shy away from making deals.

Earlier in its history, the service provider made multiple acquisitions of 13 network providers during the telecom nuclear winter. These acquisitions included three of the original pioneering ISPs, including PSINet (originally Performance Systems International), NetRail and Aleron.

Although Cogent execs told investors at the time it was founded that it would take $2 billion and two years to get established, the company was only able to use $500 million its investors provided at a time when capital dried up.

“We had to use the $500 million we raised because there was no more capital available,” Schaeffer said. “We were able to use that money to buy the distressed assets, not as operating businesses, but rather as asset purchases even though we purchased the company.”

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