After the Froth - How the Financial Markets Will Affect Information Companies
Information companies large and small have been going through a cycle of active investment and M&A activity over the past 24 months. Strategic buyers as well as private equity firms have pushed valuations to high levels, and caused an unprecedented level of industry consolidation.
This cycle raises questions for many types of players. Has the boom given information entrepreneurs an inflated sense of their value and their ability to raise capital? Will private equity firms be able to justify the high prices they have paid? What steps should information companies take to ensure that they maximize the value of their acquisitions? How do the economics of new information companies that don’t carry the baggage of older media companies affect their capital needs? What are the potential advantages of taking information companies private and removing the pressure created by public markets to show short term results? How, if at all, does M&A activity, industry consolidation, and privatization serve the interests of customers?
Moderator
Lee Greenhouse, President, Greenhouse Associates, Inc.
Panelists
Dr. Howard Lee Morgan, Partner, First Round Capital
Mike Tansey, CEO, Jobson Medical Information LLC
Tim Weller, Group Chief Executive, Incisive Media
John S. Suhler, Founding General Partner and President of Veronis Suhler Stevens
Greenhouse: Is there really a post-froth period?
Suhler: In last five non-consumer transaction amount of credit and cost of credit not so much different from January of last year, more covenants rather than covenant-free, more take-private deals than IPOs.
Tansey: John’s right in that cost of debt is up a bit but availability of debt is not there, no syndication to speak of, more mezzanine financiing.
Weller: Lots of froth, bank syndicated our first tranch of debt, but harder for new tranches. Market goes through peaks and troughs, more points, more creative in how they’re accessing capital.
Morgan: Raised a lot of capital last year for deals, did 36 acquisitions, smaller companies can be rolled up and acquired, fewer exit outlets so rollups are attractive. We did well.
Suhler: Two times in last 25 years where markets were stuck, we’re not in that situation today, froth doesn’t invite or stop deals, still a market to invest in great managers and great products, you’ll ride right through that. Deal attractiveness is not a froth or lack of froth factor, buy companies through cycles. If you do it right management teams will blow right through trends. We don’t buy based on froth coming or going, doesn’t determine long-term investment value.
Greenhouse: What is it about information businesses that have made them attractive?
Suhler: Business information companies have growth rates aren’t greatly accelerated or decelerated by consumer markets EBITDA tends to be at a premium to consumer media, high teens, low twenties, sometimes certain areas have had peak prices, but long term slightly better growth for their portfolio.
Greenhouse: Is it less expensive to start an information company today?
Morgan: Absolutely, some initial investments were 300K, some down to 200K, an enormous you can do with a lot less money.
Weller: Thirteen years needed half a million in capital, floated for 150 million a few years ago, spend far too much time at what we don’t do well, we’re a very creative industry, can adapt fast, have evolved a lot, monetizing effectively, little to no capex, lots of cash comes back.
Greenhouse: Differences between consumer and professional?
Tansey: Less expensive to create consumer products, but cost of acquiring audiences can be high, have to create both audience and community.
Morgan: You can use Google AdSense to create a business for your content overnight, then you can build a sales force to skim off the cream. Have to do more work on the ad side to create a business that’s monetizable.
Greenhouse: Audiences want data in workflows, lots of individualized workflows, core technology may be cheaper but adapting it is a greater burden. Is there some counterbalancing effect?
Morgan: Not really, web services lowers costs, easy to adapt and implement, on Wall Street high-speed hedge funds use low-latency feeds, information is quickly repurposed.
Suhler: in 1980s you packaged information, sold it and you were done. Didn’t hear about workflow integration. Glocer’s presentation was combining information and services always. Costs money to build applications and services for users to interact with, cost of building audience doesn’t change, building services that will keep renewal rates high is tough duty. In B2B trade world ads can float some of that cost, but harder to integrate advertising and sponsorship into workflow applications.
Weller: Our advantage is skillset for online piece, takes time and resources and intellectual capital, we’ve bought very good people at right rate. But we’re not enough in the workflow [comment: B2B trade media is in big trouble, not sure that this is really the year that it will turn the corner but they’re start]ing to get it].
Greenhouse: Changing technology, sometimes disruptive, is that a driver?
Morgan: In shrinking markets, can offer sustainable margins.
Weller: Content should drive strategy, not technology [comment: see our definition of content].
Tansey: The disruptive thing is understanding your customer better.
Suhler: Management teams that don’t “get it” can be disruptive. Our greatest concerns have been where the management team get it right, didn’t have the sensitivity to get the right technology in place at the right time.
Morgan: Companies like Google are disruptive as they surface information faster and oftentimes good enough free information. Knowing what customers need is very critical, have to think like customers, what would they find on Yahoo or Google.
Greenhouse: Thomsons and Reed Eleviers have built empires, where are the empire builders of the future?
Weller: Into making money for myself and management team. Google frightens, but startups that live and breathe their customers are a bigger threat. Apax have incredible aspirations to build a sizeable B2B company. Looking at Outsell numbers, we’ll be number 3 B2B soon.
Suhler: Have added 300 acquisitions to our initial 50. Empire building is making sensible acquisitions that provide benefits through mergers, to use existing scale and presence and skillsets. “Empire building” is senseless in and of itself, it’s about building margin and revenues. 25 percent of our return has come from add-on benefits of acquisitions.
This as a good session, seemed to run a little long on too few real topics, but the panelists had a lot of great insights. Investors are managing still to find good value in the marketplace that fits the best strategies and that will continue, especially as young companies listen carefully to their clients. Unaddressed: how to continue margins as older media revenue streams dry up and newer ones yield less on an ad/subscription model based on older methods.
I am not sure that the investors have the 3-5 year models in place to predict basic benchmarks such as cash flow and earnings effectively as these transitions take place. I think that there were a lot of important points raised by John Suhler about emphasizing the quality of management teams, but I wonder whether those teams are always going to be able to turn these new corners quickly enough. There’s enough “give” in these portfolios to weather the transition overall, and already a fair amount of revenue stream adaptation, but it’s going to be an interesting 3-5 years for B2B media.
I think that M&A will continue to have a pretty good year but it’s going to get harder as the purchasing companies see their fundamentals impacted by slowing traditional revenues.
- John Blossom, Shore Communications
Jason Kichline is ScribeMedia's project manager and producer of ScribeMedia's Emmy Award winning series Reporting AIDS. He likes typos, fast food and MacGyver like solutions to life's nagging problems.
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