Speakers Debate the Balance Between Buying and Building at the DeSilva + Phillips Summit
More than 200 of the media industry’s top managers and acquisition specialists gathered Thursday in New York to assess the magazine industry M&A climate, addressing in morning sessions how private equity has impacted the market and how both b-to-b and consumer media companies are creating value.
The event, the DeSilva + Phillips 2007 Media Dealmakers Summit, was attended by a star-studded roster of CEOs, lenders, equity firms and more. The luncheon keynote was delivered by Dan McCarthy, CEO of Network Communications and one of the industry’s best known dealmakers.
During a discussion on the state of the b-to-b market, panelists gravitated toward discussion of acquisition versus organic growth. Bill Pollak, CEO of ALM, noted that an acquisitive strategy has gained much favor over organic growth. “To do the internal development, which frequently takes money off your bottom line, makes it a lot harder to hit your EBITDA targets. It’s a lot easier to do acquisitions, and we do wonder if we’re doing enough to fund organic growth through the cycle.”
Nevertheless, Pollak, who said ALM had better than 10 percent top-line growth in 2006, noted that it’s always best to continue to have new things to offer. “It’s great to go to an advertiser and have something new to pull out of your briefcase,” he said.
On the same panel, Tyler Zachem, partner at MidOcean Partners, which recently bought a stake in Penton Media, noted that it’s a careful balance in capitalizing a business today while keeping an eye on a holding company’s time horizon. “You capitalize a business to ride out an economy, good or bad, and you keep an eye on the horizon and not just respond to moment to moment pressures,” he said.
Private equity’s impact on the media industry has increased over the last couple years and the day’s second panel addressed whether or not, and how, it’s able to create value. “I take issue with the question,” said Jacqueline Reses, a partner at private equity firm Apax Partners. “For years, the industry shows that it absolutely does. For those one or two quick exits, there are hundreds of transactions that create value.”
“Our approach is to build value by ﾑincrementing’ the portfolio company that we buy with organic development, and, more importantly, with add-on acquisitions,” said Gordon Holmes, managing principal at Quandrangle Group.
John Suhler, president and co-chief executive at Veronis Suhler Stevenson, added that a first-rate management team makes a big difference. “Out of 40 portfolio companies that we have funded, one out of four started with an investment theme and a management team. That’s building a company out of whole cloth. Some of our highest returns have come from these build-ups that were theme-driven rather than starting with a company,” he said.
Holmes noted that the CEO talent pool for private-equity firms to partner with has grown. “The talent pool is higher now than it used to be,” he said. “Their comfort level with working with private equity is better. The reward levels are quite high while the risk is low.”
Suhler added that despite the attractive payouts, executives are sometimes in it for more than the money. “While they’re driven to have a private-equity payday, more often than not, the people who conclude a transaction typically continue their experience in that served market space.”
On the morning’s consumer media panel, moderator Ava Seave, principal at Quantum Media, asked if there are any surprises that pop up during a deal. Adi Deheija, managing director at Sandler Capital Management, said it’s often difficult to spur a management team into action even when they understand a transition from print to online, for example, is critical. “As an outsider, it’s easy to see what needs to be done to transition a business. It’s harder to get management to actually do it even if they understand it,” he said.
Eric Schrier, president and CEO of The Reader’s Digest Association, the selling of which some consider the second-biggest deal of 2006 at $2.4 billion, noted that surprises can be minimized through a diversified revenue stream. “The best kept secret of [RDA] is how diversified it is. Twenty percent of the company’s revenue is Reader’s Digest, and advertising is only seven percent. But we’re publishing in 70 countries and selling 50 million books,” he said.
Nevertheless, Schrier noted that diversifying, especially through acquisition, is not always easy. “The hard part was convincing the board that a six-times revenue [for Allrecipes.com] was a good thing. But we weren’t just buying traffic, which was growing at 30 percent, we bought 60 people who know that business.”
John Squires, executive vice president of Time Inc., circled back to the notion that organic growth has become more difficult. “The capital that’s invested in internal projects comes out of earnings, which makes it difficult. We have been limited in terms of capital for internal investment. Our company prefers us to buy things. It’s unfortunate, but we have to live with it,” he said.