Fall has arrived, bringing an increasing chill to the air in New York. Unfortunately, this year, the chill has cut deeper, as we wrestle with the fallout from the ongoing financial crisis and frozen credit markets.

Stephen Schwarzman, Chairman of Blackstone Group, gamely summarized the circumstances leading to the credit crisis:“Basically, with the urging of Congress, 30% of total loans were subprime by 2006. These loans were packaged and rated AAA. When the loans started defaulting, fair value accounting was implemented, which led to massive write-offs. In the face of these losses, banks attempted to raise new equity, but the cost of money became significantly more expensive than lending it. So, several institutions found themselves in a structurally impossible position.”

Recently, I saw a cartoon of two men walking down Wall Street. One man says to the other, “It turns out poor people with bad credit can’t afford to buy a home. Who knew?” Certainly not Fannie Mae and Freddie Mac. Lacking any meaningful Congressional oversight, they led the vast accumulation of toxic mortgage debt that compromised the global financial system, aggressively buying subprime and Alt-A (also riskier than prime) mortgages and mortgage-backed securities. Even more serious than the bundles of subprime mortgages, however, may be the derivatives contracts tied to subprime and other dicey debt (Warren Buffett calls them “weapons of financial mass destruction”). Ironically, these contracts or credit default swaps are actually an attempt to “insure” against risks of default. In fact, they are a huge wager on how the various debt instruments will perform, and their magnitude dwarfs the $1 trillion of subprime mortgages.

Meanwhile, the House of Representatives finally passed the $700 billion bailout plan, after rejecting it the first time around. The multi-billion dollar infusion into the credit markets is intended to stimulate lending, raise the confidence of investors, and bolster the stock market. This should enable larger M&A deals to eventually be consummated once again. With private equity firms having $450 billion of uninvested capital globally, there is plenty of investment capital for deals, when the credit markets are ready.

Interestingly, despite the turmoil in the financial and credit markets, mid-market M&A activity has remained steady for the media, information, marketing services and related technology sectors, with deal volume through Q3 nearly matching the same period in 2007. I’m happy to say that JEGI has been active as well, having closed 14 transactions year-to-date. Mid-sized and smaller transactions are driving M&A activity, particularly in growth sectors, such as online media, interactive marketing services, and database information. While large leveraged transactions are on hold, strategic buyers have taken advantage of their strong balance sheets to complete nearly 85% of M&A transactions so far in 2008, as they continue to focus on growth businesses that offer complementary revenue and products and new management expertise.

Being susceptible to the whims of the economy, it’s no surprise that advertising has declined through 2008, especially for traditional media – magazines, television, radio and newspapers. Even online has been affected by the economic downturn, with slower growth rates than originally forecasted. As a result, we are seeing the following key trends: 1) information companies are diversifying their revenue to reduce their reliance on advertising and increase revenue driven by subscription-based models and workflow solutions; 2) these companies are also increasing their focus on providing content and solutions within narrow, specialized channels or vertical markets; and 3) companies are looking for greater accountability from their advertising efforts and are turning to more precise audience targeting.

At Outsell’s Signature Event, which is co-produced by JEGI and was held September 21-23 at the lovely Ritz Carlton – Half Moon Bay, outside San Francisco, a dynamic group of more than 150 information industry leaders convened to discuss the growth and transformation of this $400 billion market. According to Tim Weller, Group Chief Executive, Incisive Media, during his presentation at the event, “Our aim is to develop workflow solutions in the communities we serve and to build a more diversified revenue base.” This issue of the Client Briefing provides more key insights from Mr. Weller and other select keynote speakers.

In a recent series of interviews we conducted with CEOs of digital measurement and targeting companies, we learned more about the evolution of online advertising led by behavioral ad models, which offer more precise audience targeting and better measurement. For example, we heard from Joe Doran, CEO, Media6Degrees, which produces custom online audience segments for major brand advertisers by grouping like people together who communicate with each other within social media and user generated content online. You can read more about Mr. Doran’s company, along with the perspectives of four more CEOs of digital measurement and targeting companies, in this issue.

On a somewhat positive note, Michael Boskin, one of the foremost US economists, who spoke recently at the Outsell event, said, “My best guess is that we’ll likely have a recession, and we may have entered one by now. But I do not think it will be a severe recession outside of housing, construction and finance…I am cautiously optimistic. The next administration is going to have lots of issues to settle and many implementation considerations. But by the time we are sitting here again next year, we will probably have found a bottom, and we will have realized that as horrible as this process was, the reality was not as bad as it felt when we were going through it in real time.”

We hope you enjoy this edition of our Client Briefing newsletter. Feel free to contact our Managing Directors or me with any questions regarding the marketplace and/or our services.

Sincerely,



Wilma H. Jordan
Chief Executive Officer