Getting a Deal Done
How market realities are changing the acquisition process.
In the wild and fast days of 2007 when a record number of media deals were closing at record valuations, the acquisition process was well-oiled by massive amounts of debt at very favorable terms. Now, however, that very factor has reversed itself, drastically changing not only how deals are getting done, how many are closed and their value, but who‚Äôs doing the buying and selling.
‚ÄúIt‚Äôs definitely a buyer‚Äôs market,‚ÄĚ says Jeff DeBalko, president, business media and chief Internet officer at Reed Business Information. ‚ÄúThey hold the majority of leverage. There are, however, some incredible brands that are being sold and those sellers have real value to offer.‚ÄĚ
The Credit Factor
Nevertheless, credit has an enormous impact on both the size of deals getting done and how many can get done. And this has had the largest impact on the ability to close deals. Buyers are not able to borrow as much money, which means strategic buyers can‚Äôt get as much financing and private equity can‚Äôt make deals as top-heavy with debt.
‚ÄúThe credit environment is clearly very different,‚ÄĚ says Scott Peters, co-president with The Jordan, Edmiston Group. ‚ÄúSmall- to mid-market debt financing has been very quiet, but it‚Äôs starting to come back. It‚Äôs a lot more conservative, meaning banks are not putting the kind of facilities together like they did in 2007. Strategics are finding that getting financing is harder and private equity can‚Äôt put enough equity in and that‚Äôs impacting valuations in general.‚ÄĚ
And if you can get credit, it‚Äôs far below what used to be available just two years ago. ‚ÄúThe best case is you‚Äôd get to 2.5x EBITDA on credit, if it‚Äôs available at all,‚ÄĚ says Reed Phillips, managing partner of DeSilva + Phillips. ‚ÄúIn 2007, it was 4 to 6x.‚ÄĚ
And given the cash-strapped situation most publishers find themselves in, acquisitions have been pushed farther down the priority list in favor of organic growth opportunities. ‚ÄúPrivate equity is still very much involved in media across the board and they continue to look for opportunity but are certainly more conservative than in the past,‚ÄĚ says DeBalko. ‚ÄúThere may also be a bit of ‚Äėkeeping their powder dry‚Äô waiting for valuations to drop further. Strategics need to balance how they use their capital and weigh M&A versus perhaps paying down debt or investing organically.‚ÄĚ
Valuations are not settling down, which also impacts the deal process. While signs point to broader economic recovery, if slow, buyers are finding it difficult to pinpoint whether a category is still on the decline or on a rebound. This makes them nervous, and confidence is everything in this game.
‚ÄúIn publishing, given the volatility in both consumer and b-to-b, from a pure financing standpoint it‚Äôs made it difficult,‚ÄĚ says Peters. ‚ÄúVolatility is a bad thing when you‚Äôre putting together capital structure. It‚Äôs a troubling environment for buyers because of uncertainty. Some categories have shown a rebound, some haven‚Äôt. People aren‚Äôt clear whether we‚Äôre at bottom or on a slope back up.‚ÄĚ
Add to that situation a glut of distressed properties and the market is in for a very slow recovery in 2010. Observers note that the pipeline is still backed up with ‚Äúmust-sell‚ÄĚ assets that will hit the market this year, which will provide inventory, but deal volume will hinge on credit and buyers‚Äô ability to tolerate risk.
Getting It Done
In the meantime, buyers need to be more creative with financing options and remain picky about assets that are likely to win over a lender‚Äôs confidence‚ÄĒif that‚Äôs what it will take. Sellers have to mix patience with thoroughness. ‚ÄúIf you‚Äôre thinking of selling, really do your homework,‚ÄĚ says Peters. ‚ÄúPrepare for the sale, get audited and your financial records in excellent order‚ÄĒeverything from legal to accounting.‚ÄĚ
Creative credit solutions could mean turning the seller into the lender. ‚ÄúIn some cases they‚Äôd like the seller to provide the debt financing since it‚Äôs not available from third-party lenders,‚ÄĚ says Phillips. ‚ÄúThey would say, ‚ÄėIn the past I could have borrowed $5 million from the bank, so I want you, Mr. Seller, to be the bank.‚Äô It gets negotiated, but it‚Äôs not generally the preference of the seller to provide that.‚ÄĚ
Since there‚Äôs more than the usual risk out there, buyers are being much more conservative in their due diligence, often taking longer than normal to complete it. Sellers, therefore, should mitigate that risk by keeping their end buttoned up. ‚ÄúBuyers are probably as conservative as I have ever seen given the volatility in the marketplace, but for smart companies, the due diligence process has not really changed. They are all doing their homework and the experienced ones are doing it extremely well,‚ÄĚ says DeBalko.