Dave Schaeffer, Cogent Communications

During the worst times of telecom's bust, everyone recognized that there were many distressed assets available to buyers, usually at a deep discount. Probably no one took advantage of the situation more than Dave Schaeffer, CEO of Cogent Communications, who has acquired these assets on five occasions. Schaeffer recently spoke with Telephony's Money Matters on evaluating and integrating these assets.

How did you get your board behind these transactions?

The methodology we used coupled a rigorous due diligence with a formal analysis that would show the cash impact of these acquisitions, the impact of the ultimate enterprise value of the company and the impact on not only the current cash but also the cash that would be required to integrate these assets. Ultimately it comes down to dollars and cents for your board, that you're creating stakeholder value.

How does an acquisition of distressed assets differ from a normal M&A transaction?

In bankruptcy you've got a fair amount of protections afforded to you as a buyer, so you can focus less on pre-existing liabilities and focus more on assets and assumed liabilities.

In a non-bankruptcy situation, the concern is whether the acquisition will be a prelude to bankruptcy, which means your transaction could be viewed as a preferential transaction, and the bankruptcy court could look back and undo your transaction. Your concern is also your ability to negotiate down outstanding current liabilities as well as future or contingent liabilities. Because the target company is usually in a state of distress, you have to be much more concerned about abnormal liabilities that you wouldn't find in a normal M&A transaction.

You also have to realize these distressed organizations have typically gone through multiple layoffs, and the maintenance of their databases and their fixed asset registers were a relatively low priority. A lot of the due diligence materials that are presented are of much lower quality than you would see in a normal M&A transaction.

How do you manage to take advantage of synergies of a distressed asset transaction?

Synergies fall into two major buckets. One being the ability to effectively utilize in your network the physical assets you're acquiring. There I think a good engineering team can get to a high degree of certainty and understand both the current condition of those assets, equipment or physical infrastructure and the ability to integrate them.

The second kind of assets are customers and their associated revenue. They tend to be much more fragile. It becomes more subjective rather than objective in terms of determining exactly how much of that revenue you will be able to keep in the combined company. It's a customer care and marketing challenge to make sure that you're in constant communication in the transition and that you're doing everything possible to preserve those customers.