Where Have All the Minnows Gone?
If magazine mergers and acquisitions currently reside in the Age of Private Equity, there is mounting evidence that the industry may be evolving toward the Era of the Small Deal. There is simply a limit to how many leviathan deals can be struck before buyers troll for smaller fry. However, the challenge for buyers will be to find smaller publishing operations that are suitable candidates for acquisition.
The Small and the Few
By a process of elimination, it becomes clear why there are so few publishing acquisitions available in, say, the $10 million to $20 million range;an arena that's generally too small for the private equity investors but ideal for the right strategic, or in some cases, individual, buyer.
First, there simply aren't that many publishing operations in this attractive target range, unless they happen to be a group or title owned by a larger company. If it's a profitable division or title, it's not likely to be for sale. The rare exception: If the company is desperate to raise capital. But most of those deals have already been done. On the other hand, if the group or title is under-performing, it's probably not a good acquisition candidate anyway.
What about the legions of privately-owned magazines and magazine companies with revenues under $2 million or even under $1 million? Unless a title or company this small is an especially good fit, most of the larger buyers will not be interested. With a buying pool limited mostly to other small or mid-size publishers or individuals, it can be difficult to match the right buyer with the right seller.
Another factor that stacks the odds against finding a suitable acquisition: Buyers outnumber sellers by a wide margin. Many of the most attractive acquisitions in the sweet spot have long since cashed in the chips.
It stands to reason that a privately-owned publisher with $10-20 million in sales is in a position to command top dollar. Essentially, that is true, especially if the operation is profitable, is in growing markets, has a strong management team in place, and offers the Golden Trifecta of Communications: Print, events, and online services. You can be sure that the relatively few companies meeting this profile are bombarded with suitors. Yet many, maybe even most of them, won't sell. Why?
Some are family businesses entangled in a web of ownership covenants that all but preclude selling to an outsider. Other family-owned businesses may simply prefer to remain just that, and pass the baton to succeeding generations.
Others are successful publishers who are doing so well it just doesn't make sense for them to sell. These are the entrepreneurs who earn high incomes, enjoy numerous perks, and cherish autonomy. Even offers that scrape the ceiling of deals in this monetary range;maybe 2X annual revenues, 8- or 9-times adjusted EBITDA;may not be attractive to a seller who can earn that much personal income in a few years and still own the company. Conversely, a deal that exceeds these margins is just too risky for the buyer.
So now we have eliminated little magazines (and companies), some family-owned businesses, and publishers who are making too much money for their own good. In a market where buyers greatly outnumber sellers to begin with, who's left?
Not many, that's who's left. Indeed, there are (or will be, as the economy continues to improve) some good acquisition opportunities remaining in the $10 million to $20 million revenue range, but they are few and far between.
There are, however, a number of publishing operations in this sought-after revenue range that simply are not good acquisition candidates, even if they are or become available: The $30 million enterprise (in 1997) that is now a $15 million dinosaur; the house with a plethora of titles, all generating $1 million or less in sales, in slow- or no-growth markets; the once-formidable book that has been shuttled from owner to owner and now languishes in obscurity; and the once-dynamic powerhouse that became victimized by years of gross mismanagement. The list goes on, effectively reducing the availability of worthy acquisition prospects with each stroke.
As mentioned, this situation is likely to change as smaller publishers enjoy rebounding ad revenues and benefit from increased sales from other profit centers. Until then, buyers may well be advised to set the bar lower and take a serious look at even the smallest of properties, or a group of small titles, with an eye toward strategic fit and growth potential.
Michael D. Kreiter is director at W.B. Grimes & Co., a Gaithersburg, Maryland-based investment firm for the media industry.