M&A Outlook: The Importance of Online
Buyers Want Companies with Strong E-Media Strategies, But What Does that Mean?
The phrase has became almost cliche in the publishing mergers and acquisitions market. Buyers, whether private equity firms or strategics, want companies with strong e-media strategies, but what does that mean?
Is about revenue? Is it about having a good strategy in place for future growth? Is a strong e-media strategy demonstrated in the percentage of total revenue it brings in for a company?
The answer is all of the above, according to media bankers and the buyers themselves. "It’s sort of a broad question," said Jeffrey Dearth, partner at DeSilva + Phillips. "Certainly you have to be showing some revenue stream. If you haven’t yet been able to monetize the fastest growing segment of advertising, you’re in trouble."
The presence of revenue-generating e-newsletters and Webinars can help increase the e-media value of a company, said Dearth. But putting a desired percentage of total revenue on a company’s e-media segment is dependent upon what the buyer or buyers is seeking, he said. "It’s hard to know what the right percentage is," he said. "It should be at least 10 percent and growing. But we’ve heard of some companies that are already at 50 percent."
Strategic Vs. Private Equity Buyers
Both strategic and private equity players are looking for strong online performance in the publishing companies they seek to acquire, the experts say. But private equity firms tend to play it more safe than strategics when it comes down to the actual purchase, said Jeff Reinhardt, managing director at Berkery, Noyes & Co. "Private equity likes a more consistent, predictable, sustainable model," he said. "Pure strategics have a greater threshold for risk. They can take a chance on something and if it doesn’t prove out, that’s okay. And private equity firms are willing to pay a premium for strategics that have taken a risk and proven it out."
Some private equity firms believe that pure-play online companies are too risky of an investment. "We have never done a pure-play online investment," said Peggy Koenig, managing partner of PE firm Abry Partners, during a recent panel discussion at American Business Media’s Digital Velocity Conference. "We’ve invested in many publishing companies: Penton, Cygnus, Dolan, and F+W. Each has an e-media strategy, which is important. But we, as an investor group, have to focus on companies with high barriers to entry. And many of the online businesses we have looked at are smaller companies, low profit margins and low barriers to entry. So there’s nothing stopping the competition from coming."
Likewise, Neil Vitale, CEO of private equity-backed 1105 Media, said he often finds that the sales multiples are just too high on pure-play online companies. "I think they’re interesting but the economics of them are hard to fathom from our world of paying high single-digit to low double-digit multiples on EBITDA," he said. "And then you have online companies expecting high multiples to be paid on revenue for a business that is not profitable or break-even."
Monetizing the Web
Clay Hall, CEO of Aspire Media, believes companies devalue themselves by as much as a third when they do not have strong e-media strategies in place. And a strong e-media strategy, he said, is one that is profitable and sustainable. "But strategies tend to vary wildly," he said. "Some are ad-driven. Some are driven by lead generation. Some are used for e-commerce. Some act as a portal. In cases such as ours, we have so many products we can sell to enthusiasts, it makes sense for us to use the Web as a direct marketing tool."
For more on strong e-media strategies, see the May issue of Folio: magazine.