At the DeSilva & Phillips M&A Conference in February, Wasserstein & Co.’s Anup Bagaria, who had recently managed the acquisition of Primedia Business (now Prism Business Media) for $385 million, was asked about financial discipline. While he has a reputation for tight cost discipline when it comes to managing Wasserstein’s existing holdings (ALM and The Deal LLC), the questioner noted, does he have the same discipline when it comes to buying properties?

That question is central for all private-equity players these days. While b-to-b publishing companies continue to struggle in a transformative time private-equity shows no hesitation in its fervor for magazine companies. Now, as PE ownership matures, comes the phenomenon of publishing companies that have been sold to and from private-equity firms multiple times. While not exactly adhering to the traditional financial definition of “flippers” (stocks being sold again and again in rapid order), there are many publishers out there who have been “flipped” several times. With strict cost-management over an extended period, how often can a company be sold before it dilutes the assets that made it attractive in the first place?

“The dilution has already occurred,” says Frank Anton, CEO of Hanley Wood. “It’s almost like someone believes in the greater-fool theory of business, which is ‘I know I’m paying too much but someone will come along and pay even more than I did.’ We’ve been lucky, we haven’t been subjected to the horrors many of these companies have seen. If you bought one of these companies that’s been flipped several times, you have to sell off stuff that doesn’t fit very well, make the business smaller and stronger, then make it big again.” That’s a path that’s hard to take for many financial buyers. “If you buy a $100 million company, it’s hard to grasp that you’ll make it stronger by turning it into a $60 or $70 million company by divesting stuff but in long run, you will,” says Anton.

Other observers say private-equity firms aren’t the only ones flipping companies. “I think it’s disingenuous to put it in terms of financial buyers,” says Tom Kemp, managing director at Veronis, Suhler Stevenson. “Strategic buyers, like Cahners, Reed and VNU, have been buying and selling different publishing assets for the last 100 years. It’s part of business. You have to collect and concentrate, and other times you go through a process and sell off. It’s a matter of trading assets.”
And with that comes the occasional misstep. “The fact is, sometimes you overbuy, and value goes downhill, and then someone else thinks they have the opportunity to buy cheap,” says Kemp, who seconds Anton’s view that there’s always a new buyer waiting in the wings (only in a more optimistic light). “There is usually a buyer for something that has long-term value to it. It’s not like these are shopworn products that lose value because they change owners as long as the people in charge of those assets do a good job.”
Newly acquired products usually go through a series of changes as the new owner starts long-term preparation for selling. “Any buyer looks to increase the value of the assets you buy—one is by cutting costs and improving margins, the other is investing in products and growing organically through launches,” says Kemp. “Another is to do add-on acquisitions that make strategic sense that add scale. Most strategic and private-equity buyers do a combination of all three.”

The publishing industry is filled with flippers. Advanstar is on its third private-equity owner with DLJ. Cygnus is on its third private-equity owner through ABRY, and will probably be sold to a fourth shortly. On the consumer side, F+W is on its third private-equity owner, having gone from City Group to Providence to ABRY. “They can be sold endlessly,” says Reed Phillips, managing partner at DeSilva Phillips. “There’s no limit. It’s been proven with some of these companies that beauty is in the eye of the beholder. They may see opportunities the prior owners didn’t see. It comes down to the imagination of the management team and the private-equity partner.”
The problem is, the majority of these deals haven’t panned out for their latest owners. “The other thing that surprises me is that people keep buying businesses with a lot of different markets but no dominant market position,” says Anton. “I’m not saying you have to take the Hanley Wood approach and focus on a single market. However, companies that are highly diversified die by a thousand cuts. IDG is single-market focused and technology got hammered more than any other category. But IDG might be the single strongest b-to-b media company in the nation right now.”
The danger with flippers is that market changes can dramatically effect a new acquisition. Ziff Davis had been a terrific performer for Forstmann Little and Softbank, and Willis Stein’s acquisition of the company for $780 million (an eight-time multiple on 1998 cash flow of $100 million) in 1999 was considered pricey but smart, with a lot of potential coming from the marriage of ZD Publishing and ZDNet. Six years and one massive recession later, Willis Stein is said to be shopping Ziff again and is unlikely to get anywhere near that $780 million price tag. Even accomplishing a return that covers Ziff’s debt load of $357 million may be difficult. The company averted bankruptcy in 2002 by restructuring its debt and in 2005, Ziff saw EBITDA drop 50 percent from $35 million to $17 million, while revenue plunged from $204 million to $187 million. In 2000, Ziff Davis estimated that it held 25 percent of the tech magazine market. In 2005, the company estimated that it held just about 13 percent of the market.
However, Ziff is still a significant publisher, offering huge brands such as PC Magazine, E-Week, Electronic Gaming Monthly, Computer Gaming World, CIO Insight and the Official U.S. Playstation magazine. In a recent survey of computer magazines, PC Magazine was named among the most read. Still, Willis Stein may be getting out while it still can. “Multiples are good,” says one financial and investment specialist from a major publishing firm. “There is consolidation. They have a decent position on the enterprise side, and they have built up a good business online. So they have a decision: They can grow or they can sell.”

Few companies have endured owner swapping like the assets that make up Primedia. Founded 17 years ago by Bill Reilly, Beverly Chell and Charles McCurdy, with leveraged buyout firm Kohlberg, Kravis, Roberts & Co., Primedia acquired dozens of magazine companies in deals worth billions of dollars.
KKR built a new growth model, the leveraged buildup, where acquisitions are run in a decentralized manner and their cashflow is used to both pay down their debt and make additional acquisitions. Primedia grew to about $1.7 billion in the early years of this decade. Today the company has $1.4 billion in debt, its stock is trading under $2 and in the last three years, has sold off more than $1 billion worth of properties, including the b-to-b division and is currently shopping its Crafts and History Groups. In 2000, Primedia published more than 100 titles on the consumer side and 82 b-to-b magazines. In 2005, the company published 98 titles total.
Through the first quarter of 2006, Primedia generated $241 million in revenue, up 5 percent from the same period last year, while operating income fell 10 percent to $21.3 million. “Once you overpay and overleverage, you just have to get lucky,” says Anton. “The market has to fall in line, you have to make good business decisions. You have to have the right people, and sins you made upfront can be forgiven. But if those things don’t fall in line, you’re punished for those sins forever.”

Still, it’s unlikely deals will slow down based on recent performance. “Hope springs eternal,” says one strategic operator. “The margins in the publishing business, with trade shows and data, are still great. Money does not go where it does not get interest, is not appreciated, nor treated well. Money in the publishing business is appreciated and gets treated well.”

Ultimately, investors realize not every acquisition is going to be a winner, hence the purpose of a wide-ranging portfolio with dollars spread across multiple companies. In the memorable phrase of a publishing operator describing how equity funds look at their investment portfolios, “If you have 20 flowers and one dies, you still have 19 flowers.”