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Tuesday, April 26, 2005

M&A Mania 

The story so far:

Questex bought a $100 million chunk of Advanstar. Advanstar is now focusing on enhancing its remaining markets.
Apprise Media has bought Canon Communications.
Hanley-Wood is for sale.
Primedia's b2b unit is for sale (for a nice insider's take, see Paul Conley's blog.)

And, of course, there have been a lot of other announcements in the past few months.

What's behind all of this b2b M&A activity? One read: burned investors are getting out of b2b, or narrowing their portfolios, while multiples are reasonably high. They're hoping to get out while the getting is good (or at least, given the returns over the last few years, mediocre), and let some other poor sap waste his money. B2b is dead.

Another read (mine): This cycle of activity was completely to be expected. It's happened before and will happen again. It has little to do with the future of b2b as a medium, and more to do with the human inability to learn from the past.

I have a view about M&A cycles in general, and about b2b publishing in particular. Here 'tis: larger b2b companies aggregate products through acquisitions, with a grand vision of creating the biggest, and theoretically, the greatest value for their owners. But these b2b conglomerates eventually suffer from several things:

Lack of senior management depth
Lack of patience due to high debt loads and investor expectations
Lack of an exit strategy

Each lack has a specific outcome.

Management depth. Big multi-portfolio b2b companies with high debt loads tend to manage from the P&L and balance sheet, and that's where the focus of senior management is. They can't spend enough time in their markets to look for new opportunities to serve their customers. And the company tends to stagnate as a result, while smaller, more nimble publishers (or websites) eat away at marketshare. There's never enough senior management in b2b conglomerates to go around, either. So strategic and tactical decisions at the market level often get deferred. Who has enough time to meet with bankers, reforecast results, cut staff and meet with customers in tens or hundreds of markets?

Patience. B2b conglomerates can't ride out market lows, and can't invest during those lows. They need results now, and make decisions that improve those results for the short term, but hinder long-term prospects. New product creation slows or halts. Core business assets see cost cuts in core areas--circulation development, editorial and more. Staff is trimmed, new hires are stopped. The damage done by these moves is recognized, but what can they do? They have to make their numbers.

Exit strategy. The bigger the b2b conglomerate, the more limited the exit strategy. The former big idea was to go public, but Penton and Primedia each showed that the public markets are even less patient than the private investment markets. Some companies, like Advanstar and Network Communications, found themselves flipped from one private investment group to another. But these flips have an end point as well--how much big money can chase after big money? Ultimately, these conglomerates end up with just one exit strategy: break up into smaller, more easily justified pieces ($150-$500 million buys). Advanstar broke off a chunk of its business...and who knows? More may follow. Primedia is breaking off a chunk of its business. Veronis Suhler Stevenson has broken off Canon and Hanley-Wood. (Though these latter cases are obviously different, since each was run as an independent company).

The challenge with all this activity is that the cycle begins anew. New owners, with high debt and high investor expectations, look to grow. They'll make acquisitions, and eventually suffer from the 'lacks' outlined above. And we'll see another round of sales and breakups, probably in about 5-7 years, depending on the economy and multiples.

The sweet spot in b2b is the smaller company, the $10-$40 million b2b groups. They're small enough to focus management time and attention on their markets, which gives them great growth patterns, and the ability to invest to stay ahead of technology, as well as audience and advertiser expectations. They're often not saddled with crushing debt. And they have a natural exit strategy--a sale to one of the new nascent b2b conglomerates.

I recognize that I've oversimplified here, and that companies like Hanley-Wood, with its laser-like focus on a single market, is much different from a multi-market portfolio company like Primedia or Advanstar. But that's why Hanley-Wood will probably command a premium price in the market, and why Primedia and Advanstar's investors are taking it in the shorts with those sell offs. (In many ways, Hanley-Wood operates like one of those $10-$40 million b2b companies...and because of that, has managed to grow well beyond that while keeping its management focus).

I'd love to see a comparison of IDG over a ten year period with some of the other b2b conglomerates I've mentioned. IDG has managed to avoid all of the 'lacks' I've outlined through a strategy of decentralized control, strong market focus, private and patient ownership, and no real current need for an exit strategy.

But IDG is far from the norm.

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