2005: The view from here.
When investment bankers are busy, that’s a pretty good indicator that an up-cycle is in full swing. As we launch into 2005, we’ve never been busier. With buyer interest on the rise and information companies fully valued, we maintain a positive outlook for the year ahead.
Over the past twelve months, we’ve managed 16 transactions priced in the $25 million to $400 million range. But the significance of this volume lies less in the size of the deals than in their range: we’re seeing robust activity across virtually every information and media segment, from business information to healthcare to S-T-M and education.
In this issue of Outlook & Strategies, we’ve asked our senior investment bankers to share their views on the specific segments they cover and to identify the key trends that will shape the information and media market in the months ahead. If there is one theme that emerges from these pages, it’s that the current market places a premium value on companies that dig deeper to better understand their customers.
No matter what market you sell into, chances are your customers are less interested in a wide menu of products and services and more focused on practical solutions to the challenges they face. Today, depth is replacing breadth as the defining strategic characteristic of information industry leaders.
M&A forecast: sunny (for now).
Three converging forces may be gathering into a perfect storm for M&A activity in the year ahead. While major strategic buyers with cash-rich balance sheets exercise caution, private equity buyers are jumping in. It won’t be long before the majors deploy that cash in pursuit of profitable growth. Meanwhile, the lowest capital gains and income tax rates in recent memory provide ample incentive to sellers. Since relatively cheap money and low taxes can’t last forever, we’re adding capacity to handle the rising deal flow we expect in 2005.
Strategics grow vertically…
Having successfully shed non-core assets – often at surprisingly robust valuations – and many of them flush with cash, major strategic players are looking to grow through vertical acquisitions that extend their reach into existing markets. To meet more of their customers’ needs, these companies are repositioning from mere sellers of published information to providers of branded information solutions. By deepening their penetration into their customers’ business, these companies redefine the customer relationship from that of buyer-seller (price-sensitive, vulnerable to competition) to something like strategic partner (loyal, long-lived and profitable).
…while private equity buyers rival majors.
Having succeeded with early-round investments, the private equity players will ramp up their acquisitions activity in 2005, going head to head with strategic buyers and stepping up to the higher multiples. Awash in cash and under pressure to use it, these funds bid aggressively for high-quality assets, courting sellers with full valuations and winning over management with the prospect of continued employment and often a piece of the action, as well.
Tech boom redux?
Though many investors are still licking wounds from the tech bust, there are literally thousands of companies that today are bearing the fruit of a period marked by creativity and innovation. Not the household names, but the niche providers who are successfully serving up electronic or web-based solutions to carefully defined markets. Whether in legal tech, drug informatics, compliance, education technology – or hundreds of other segments, these companies are living up to the promise of the information revolution, and will have a profound effect on the international economy in a relatively short period of time.
Software suppliers seek scale.
In the highly fragmented software market, populated by niche-focused companies that provide specialized solutions, the need to build scale will drive consolidation. There are at least three reasons why scale matters: First, with little or no marginal expense for each incremental unit sold, software companies need scale to be profitable. Second, scale equals brand strength, especially in a fragmented niche market supplied by companies with little brand recognition. And third, scale (combined with brand strength) gives customers confidence that the company will endure, at least for the life of the software license and maintenance contracts it sells.
B2B advertising growth.
B2B advertising and trade show exhibitors ramped up their spending in 2004, and we see nothing to derail that trend in the year ahead. After three years of flat or falling ad page counts, B2B publishers enjoyed a modest but telling increase of about one percentage point, while exhibition spending appears to have jumped by some 5%, attesting to the strong demand for one-to-one marketing opportunities. Expect B2B media sales to grow 5%, tradeshow revenue by 6%, and M&A multiples increasing by an average of ten percent over the next 12 months.
Up next: “No teenager left behind.”
Expanding federal mandates for ever-broader high-stakes testing will further bolster the assessment and test-prep markets as schools and districts fear the loss of federal funding or even state take-overs. The growing prevalence of high school exit exams may not keep kids from graduating, but assessment spending is on the rise.