Trends to Track in 2004
For those of you holding your breath until the business cycle turns, go ahead and exhale. Most of the key indicators that describe the direction of the publishing and information markets are pointing north.
While there’s little justification for the exuberance (rational or otherwise) that characterized the last up-cycle, there appears to be sufficient momentum to drive slow but steady improvement across the information spectrum. Companies that have shed non-core assets, rationalized their revenue mix around high-margin products, and maintained investment in new products and processes should be well positioned for growth in the year ahead.
If you’re keeping score, note that this page accurately predicted the current rebound a year ago, calling for a slowly improving second half of 2003, followed by steadily stronger performance in 2004. With low interest rates likely to persist through the next twelve months, combined with improved corporate profits and stock prices, there is no reason to alter that outlook.
M&A Activity Gains Momentum
Berkery, Noyes’s own experience has been a reliable bellwether for the broader market. With four transactions closed in the fourth quarter of 2003 and more in process at the start of 2004 than in either of the two previous years, we are already seeing a rebound. While we don’t see a market boom, we do anticipate one that steadily gains momentum. We forecast a solid increase in transaction volume, size and quality.
Majors Sharpen Focus on Core Assets
Large strategic players will continue to divest noncore assets and units with little or no near-term growth potential. While slowing overall revenue growth, these divestitures are strengthening balance sheets, improving earnings, and generating cash to invest in core business activities. Many strategic players will use the cash to retire expensive debt, while a good cash position and improved stock prices will make it easier to acquire complementary verticals in their core markets.
Acquisitions Still The Route to Growth
The pace of acquisitions will ramp up as the year unfolds, with information providers across most segments resolving the buy-it or build-it dilemma in favor of the former. Stronger balance sheets, less restrictive lending, and more plentiful private sellers will fuel the drive toward increasing scale along with increasing activity from foreign buyers, especially those European companies that can use a favorable exchange rate to their advantage.
Lending Loosens, But Not Much
As the year goes on, banks and other lenders are likely to loosen their purse strings, making more cash available. Hardly a clearance sale, these financing sources will continue to take a hard look at potential loans, and defray as much risk as possible. As usual, the easiest money is available to borrowers who don’t really need it.
Equity Funds Still Active
The private equity funds that drove so much of the acquisition activity in the last decade are today a primary force in the market, paying reasonable prices for quality assets and achieving a scale that makes them impossible for the major companies to ignore. With sizeable pots of use-it-or-lose-it cash to invest, they generally view the more sensible valuations as a buying opportunity, while a few still see that it is possible to consolidate a number of smaller acquisitions into a large enough roll-up to interest the majors or potentially take public.
Election Year Spurs Economic Scrutiny
The democratic process isn’t particularly pretty. Whether tax cuts or budget deficits actually drive or impede long-term economic growth are open questions, but certainly worth asking. And whether Washington policy moves markets, or is moved by them, is beyond the scope of this forecast. Though there is always a measure of economic uncertainty during a presidential election year, the animated debate over fiscal policy should be a net positive.
Profit Growth Among Major Publishers
Major publishers are starting 2004 in pretty good shape. Though spectacular revenue growth is unlikely over the next twelve months, the largest information providers appear to be well organized for efficient operations. Watch for slow top-line growth, especially in more traditional segments, combined with sensible fiscal management and generally improving profitability as publishers adapt to new verticals.
Electronic Publishing Coming…Still
The full promise of electronic publishing is still that – a promise. It’s taking longer than most people anticipated for end users to adapt and the real value of electronic delivery to sink in, so most publishers still have a way to go before making their investment pay off. Twelve months is too short a horizon, but over the next two to three years we’ll see leaders emerge (some of which may not yet exist) as stable, well-organized and self-sustaining businesses. These will slowly grow into positioning themselves as a strong and leading market segment over the next ten years.
Corporate Training Weakness Persists
We don’t see much of an upturn in corporate training until revenues and profits of the top 500 or 1,000 companies show stronger improvement – probably 12 months out. Weakness in the segment has spurred several divestitures in the past year, suggesting an effort to consolidate those assets in companies where training is the central focus. Longer term, large and midsize companies will come to treat training as a must, leading to overall sector growth.
Fewer Education Deals
Among well-heeled buyers there is strong demand for complementary acquisitions, but the supply of successful small to midsize niche publishers is modest. From a mergers and acquisitions standpoint, this will be a low-intensity segment for the foreseeable future, with supplementary publishers that can provide access to specific niches likely to stir the most interest among major players. M&A activity among for-profit education providers is likely to remain robust through 2004.