In Challenging Market, Content Still King

What a difference a year makes. When the Specialized Information Providers Association (SIPA) gathered at this time last year, the mergers
& acquisitions market was pushing historic highs. Fueled by a vast pool of private equity investment ($300 billion in new equity raised in 2007 alone) and easy access to credit on highly favorable terms (leverage at six to ten times EBITDA or more) buyers were plentiful and no valuation seemed too high.

All that changed in July and August, when lenders re-evaluated their credit risk and lowered the level of leverage available that increased the cost on large, leveraged deals. Almost overnight, the era of “covenant-light” debt and “staple” fi nancing ended. Lots of transactions
— especially those valued above $1 billion
— stalled, some left to wither on the vine and others repriced downward to refl ect higher borrowing costs.

Return to Normalcy

Look a little deeper, however, and a much brighter picture becomes apparent. While large, billion-dollar-plus transactions are still challenging, the climate for middle-market mergers and acquisitions — especially deals priced in the $25 million to $300 million range
— is decidedly strong, especially in attractive niche markets.

Strategic buyers — many flush with cash and hungry for growth — are paying premium prices for bolt-on acquisitions, valuing targets at levels that were very attractive to sellers back in the pre-run-up days of 2004 to 2006. Lenders are willing and able to finance these acquisitions, at terms in line with those that have traditionally prevailed in past M&A up cycles — leveraged at 3 to 5 times EBITDA.

Call it a return to normalcy, when credit terms accurately reflect risk, valuations are commensurate with underlying asset quality, and both investors and sellers have realistic expectations of potential returns.

What Drives Value

There is no mystery to what drives higher values in the information business. Businesses that offer a mix of revenue streams — for information providers, that could be a balance of print, online and trade shows — are especially attractive to buyers. So are companies in large, high-growth markets, and businesses that generate strong margins.

Not surprisingly, subscription-based businesses command higher prices than those that rely on advertising, and need-to-know content trumps nice-to-know by a significant margin.

Ten years ago, the buzz in the information business was reduced to “content is king.” It still is. There is robust demand for companies that can monetize content via multiple channels
— email, web cast, videos, print, meetings, consulting — and lenders are more than willing to finance generously priced transactions when they are convinced that the cash flow characteristics and post-acquisition models support it.

While the media love a dramatic story, the truth is that reports of the demise of the M&A market are greatly exaggerated. In fact, based on current transaction volume, we anticipate sustained strong M&A activity in 2008 and 2009 for middle-market information companies.