Early every Monday now, in the hours prior to the market’s opening, the business wires are buzzing with news of deals hatched over the weekend. And conditions are ripe for an extended run of transactions, following a mostly dreadful 2009. In particular:
- GDP is now expanding for the fourth consecutive quarter, boosting corporate profits, personal income, and confidence.
- Unemployment continues to drift downwards from its 10% high.
- Inflation has sunk to its lowest point in two generations, and the economy still retains significant slack in manufacturing capacity, office space, and people. Oil and other commodity prices are slipping, and troubles abroad have strengthened the dollar. Low interest rates will linger.
- Many large buyers have accumulated piles of cash on their balance sheets.
- Public-company equity has regained its value as a deal currency. The P/E ratio of the S&P 500 exceeds 20 today, far above its recession low of 13.
- Dealmaking builds its own momentum, and the number of transactions should accelerate in coming quarters, barring the disintegration of the Eurozone or some other economic calamity.
Still, this is not 2007, which everyone should be happy about. Back then – it seems ages ago – banks and other lenders were tripping over each other to fund essentially any deal with a pulse at low cost and with few covenants. As a consequence, private-equity funds readily outbid strategic buyers, a phenomenon counter to the laws of God, Man, and Ben Bernanke. And the media industry is still suffering the consequences: workouts, bankruptcies, liquidations, portfolio write-downs, and most harmful, a continuing shortage of middle-market credit.
But since the fourth quarter of last year we have seen several significant media exits: Omniture, Zappos, and Bankrate most notably. The public offering from Quinstreet was a landmark of sorts in the post-bubble era, and recent deals for Associated Content and possibly iCrossing, plus Apple and Google’s rush to buy into the mobile ad market, have stoked the M&A fire.
We’ll no doubt be seeing more transactions, for all the macro reasons cited above, as well as others peculiar to media industry:
- The remarkable velocity of new media products and services reaching the market adds great pressure to buy into a market now, instead of waiting to build a competitive offering.
- Private equity portfolios have stabilized, and many funds have significant cash on hand. Meanwhile, leverage is creeping up, especially at the market’s higher end.
- Valuation expectations on both sides of the negotiating table are recalibrating. The bottom-fishers who dominated the market 12 months ago have been pushed to the sidelines by smart, value-oriented buyers. Sellers, meanwhile, are realizing that the forces that created bubble-era prices are nowhere on the horizon.
Nonetheless, while the appetite for deals seems to grow more acute by the month, buyers are still maintaining their discipline, looking for 1) profits, cash flow, and expanding margins, not just eyeballs; 2) any sort of sustainable competitive advantage: technology, IP, regulatory; 3) Multiple revenue streams; 4) Management that is smart and adaptable.
What it adds up to is a healthy environment that will continue to draw high-quality sellers, but probably not enough to keep pace with an expanding pool of eager buyers. So, as in any rational market, increased competition will push prices up, especially for market leaders.