In Challenging Market, Content Still King
What a difference a year makes. When the
Specialized Information Providers Association
(SIPA) gathered at this time last year, the mergers
& acquisitions market was pushing historic
highs. Fueled by a vast pool of private equity
investment ($300 billion in new equity raised in
2007 alone) and easy access to credit on highly
favorable terms (leverage at six to ten times
EBITDA or more) buyers were plentiful and no
valuation seemed too high.
All that changed in July and August, when lenders
re-evaluated their credit risk and lowered the
level of leverage available that increased the
cost on large, leveraged deals. Almost overnight,
the era of “covenant-light” debt and
“staple” fi nancing ended. Lots of transactions
— especially those valued above $1 billion
— stalled, some left to wither on the vine and
others repriced downward to refl ect higher
borrowing costs.
Return to Normalcy
Look a little deeper, however, and a much
brighter picture becomes apparent. While
large, billion-dollar-plus transactions are still
challenging, the climate for middle-market
mergers and acquisitions — especially deals
priced in the $25 million to $300 million range
— is decidedly strong, especially in attractive
niche markets.
Strategic buyers — many flush with cash and
hungry for growth — are paying premium prices
for bolt-on acquisitions, valuing targets at levels
that were very attractive to sellers back in the
pre-run-up days of 2004 to 2006. Lenders are
willing and able to finance these acquisitions, at
terms in line with those that have traditionally
prevailed in past M&A up cycles — leveraged
at 3 to 5 times EBITDA.
Call it a return to normalcy, when credit terms
accurately reflect risk, valuations are commensurate
with underlying asset quality, and both
investors and sellers have realistic expectations
of potential returns.
What Drives Value
There is no mystery to what drives higher
values in the information business. Businesses
that offer a mix of revenue streams — for information
providers, that could be a balance of
print, online and trade shows — are especially
attractive to buyers. So are companies in large,
high-growth markets, and businesses that generate
strong margins.
Not surprisingly, subscription-based businesses
command higher prices than those that rely on
advertising, and need-to-know content trumps
nice-to-know by a significant margin.
Ten years ago, the buzz in the information
business was reduced to “content is king.” It
still is. There is robust demand for companies
that can monetize content via multiple channels
— email, web cast, videos, print, meetings,
consulting — and lenders are more than willing
to finance generously priced transactions when
they are convinced that the cash flow characteristics
and post-acquisition models support it.
While the media love a dramatic story, the truth
is that reports of the demise of the M&A market
are greatly exaggerated. In fact, based on
current transaction volume, we anticipate
sustained strong M&A activity in 2008 and 2009
for middle-market information companies.