Largest M&A Transactions of the Year Still to Come
Reed Phillips III, managing partner of the 10-year-old media investment firm DeSilva & Phillips, says that after a strong first half of 2006, he expects a flood of activity in mergers and acquisitions over the final months of the year.
PE: What does the current M&A market look like for the magazine industry? Is it a good time to sell or a better time to be looking for potential acquisitions?
Reed Phillips III: It continues to be a good time to sell. The market in 2005 was very strong, and it continues to be strong in 2006. In 2005, a lot of the properties that went to market were top-shelf media properties that sold for high valuations. That encouraged a lot of owners of second- and third-tier properties to put their properties on the market, expecting high valuations. While the valuations for those properties have been good, in some cases these owners aren’t seeing the kinds of valuations they had hoped for. There are a lot of transactions on the market right now. And we are expecting a lot more in the second half—even more than we have seen in the first half. There are also a lot of discussions about some fairly significant transactions and, based on the pipeline we are currently seeing, we think that the largest transactions of the year are going to occur in the second half.
PE: What other trends are you seeing in the market?
Phillips: The market continues to be strong. One twist that we are seeing is that the strongest buyers continue to be private equity firms. [Strategic acquisition firms] seem to be more focused on buying properties other than magazines: trade shows, online businesses, etc. They are looking to deepen and diversify their media holdings, rather than expand into new markets. They want to make sure they are media neutral in the markets they are currently in, so they are not just delivering magazines, but also online newsletters, database information, custom publications, etc. The focus [strategic acquisition firms] have right now seems to be, “How can we deliver more to our current customer base?” They are less focused on expanding into new markets. But private equity definitely is picking up the slack there; they are keenly interested in magazine properties, and that interest continues to be strong.
PE: When evaluating a prospective acquisition, what would you advise the buyer to look for in the new company? And what red flags should you keep an eye out for?
Phillips: I think you are always looking very hard at the financials—revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and … growth: How much has the business grown in the last three years? What are the growth prospects in the next three years? Those are the key areas I would emphasize. One of the things that you need to ensure is that the seller is properly allocating all of the expenses associated with running the business to the business, so that they are not showing an inflated EBITDA.
PE: How long does the entire acquisition process typically take, start to finish?
Phillips: Typically, when [we are representing] the seller, a sales process, start-to-finish, typically takes six months. We would prepare an offering memorandum describing the business, and we would then approach logical buyers on behalf of the client. We would then negotiate the transaction to the closing.
PE: So you expect a very active second half of 2006 in the M&A market?
Phillips: Definitely. We have completed eight transactions as of today [for 2006], but we have more in the pipeline than we’ve ever had in our history, I would say.