2008 was truly like a “Tale of Two Cities.”
The first three quarters of the year had respectable economic
growth and resulting mergers activity. However, the fourth
quarter was a completely different story, as the economy ground
to a halt, along with the M&A markets. While it has been
a very challenging year, to say the least, it was one that
brought out the best in JEGI’s tenacious team of bankers,
not to mention our professional and support staff. We succeeded
in closing 17 deals for the year, including three in the fourth
quarter, when few deals were completed. This included the
sale of online behavioral ad network acerno to Akamai for
$95 million, the sale of Staffing Industry Analysts, the premier
data and research provider for the temporary workforce, to
Crain Communications, and the sale of BZ Media’s Software
Test & Performance group to Redwood Collaborative Media.
The upheaval in the general economy and financial markets
in recent months has certainly changed the pace and profile
of M&A, as compared to the past few years. The slumping
ad market has also furthered the divide between traditional
media and new online media and information businesses. Forecasters
are predicting negative growth through 2010 for a number of
sectors (e.g., newsletters, consumer magazines, business magazines).
On the other side of the divide, the four most promising
sectors that JEGI covers – Database & Information,
B2B Online Media, Consumer Online Media and Interactive Marketing
Services – are expected to garner 88 cents of every
growth dollar in US Media from 2007 to 2010. We are especially
bullish on marketing services, because we anticipate that
the advertising slowdown will alter marketing spending patterns
and surface many compelling M&A opportunities. We expect
CMOs to funnel leaner budgets away from “above the line”
brand awareness to “below the line” marketing
to drive leads, directly impact sales and quickly shift market
share.
Technology will play a decisive role in this transition,
and recurring revenue models will prevail. We anticipate keen
interest and increased M&A activity in such sectors as
customer contact, loyalty and CRM, and interactive advertising
optimization, as well as market research and information solutions.
Media models that generate large audiences at an efficient
cost should also be in demand.
Looking ahead, we’re of the opinion that M&A activity
will begin to rebound toward the end of Q1 2009, as the US
continues to take measures to ease the credit crunch, and
return liquidity, stability and confidence to the financial
markets. On December 16, the Federal Reserve slashed interest
rates to an historic low range of 0% to .25%, from 1%, and
signaled that rates will be kept low for some time. The Fed’s
decision to cut rates, while expanding its balance sheet by
buying Treasury bonds and mortgage backed securities, herald
its entry into quantitative easing, a tool of monetary policy
that effectively means the central bank prints new money,
in order to increase supply. The Bank of Japan used this policy
effectively in the early 2000’s to return liquidity
to the markets.
Liquidity was certainly a topic of much interest at JEGI’s
annual Growth Conference, which was held on November 13 at
the Four Seasons Hotel in New York City. More than 200 senior
executives heard from a select group of speakers, including
private equity investors and c-level media executives. Excerpts
from the dynamic panel discussions, case studies and presentations
are included in this edition of the Client Briefing.
A general theme throughout the conference was that quality
is still key, and companies must be strongly profitable and
growing to raise investor interest, because returns will primarily
come from growth, rather than financial engineering. As one
might guess, there is greater interest among buyers in market
sectors with revenue streams that are less affected by economic
downturns. According to Jeffrey Stevenson, Managing Partner,
VSS at the Growth Conference, “…we are focused
on more resilient market sectors, such as education and healthcare,
and on business information companies that have recurring
revenue.”
As it turns out, many strategic media companies have cash
available to invest in acquisitions, as part of their long-term
strategy, and PE funds are sitting on $500 billion of uninvested
capital, waiting for the right opportunities. The PE investors
at the Growth Conference stated that they were investing more
equity in deals than they ever had before. The intention is
to recapitalize acquisitions with debt, once the credit markets
return.
Recently, I’ve become dismayed by the barrage of negative
press that perpetuates fear and uncertainty, leading to the
continuation of the downward cycle. Some of the articles I
have read lately, in which the Dow is predicted to fall to
4,000, remind me of the “Dow reaching 100,000”
predictions from the late 1990’s. I didn’t think
the Dow would reach 100,000 then, and I don’t think
the Dow will reach 4,000 now. The problem is that no one is
talking about the positive, such as the Dow’s 18% climb
to 8,924 on December 16, from a recent low of 7,552 on November
20. According to Robert Shiller, the Yale economics professor
and author, “What I’m worried about right now
is that our confidence has been hurt, and that’s difficult
to restore.”
We look forward to the return of stability in the financial
markets, along with investor and consumer confidence, and
we hope you enjoy this edition of the Client Briefing. Please
feel free to contact our Managing Directors or me to discuss
the overall market or your M&A and strategic advisory
needs.
We send you best wishes for a wonderful New Year, and as
Michael Chen (President & CEO, GE Commercial Finance,
MCE) said at our Growth Conference, “Hopefully, we’ll
all be smiling at this time next year.”
Sincerely,
Wilma H. Jordan
Chief Executive Officer |
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