Will B2B publishers be forced to partner for online growth as Private Equity force up acquisition costs?

Chuck Richard, the Vice President & Lead Analyst at the leading analyst firm Outsell has produced an excellent piece of analysis on this issue. He cites United Business Media (UBM) CEO David Levin’s recent statement at the Reuters Global Technology, Media and Telecoms summit, that "we are seeing people in private equity companies making bids this year for much smaller vehicles than they would have last year" in spite of soaring valuations. The effect, he says, is that especially "somewhere around the $100 million mark in transactions, there is infinite capital available and the competition just goes through the roof for assets and the prices are phenomenal."

Reuters cites a Credit Suisse research note on business-to-business professional publishing, saying a CS broker "expects to see more defensive acquisitions, noting that post-synergies multiples in education publishing had jumped to 15 to 20 times forecast underlying 2007 earnings, compared with a current sector average of 12.6 times.... As the line between potential buyers and targets became increasingly blurred, Credit Suisse said that a re-rating of all professional publishers towards peak historical multiples of 17 times one-year forward underlying earnings was likely." Levin says UBM has stepped away from auctions in which as many as 50 companies were examing the offering memoranda, and singled out one deal around the $100 million level that two private equity companies fought over, even though there appeared to be no evident potential synergies.

Outsell comment that these remarks come only weeks after the industry marveled at the multiples a publisher, Informa, paid for Datamonitor: 7.3x revenue and 31.7 times Datamonitor's reported EBITDA for the year ended 31 December 2006 of GBP 16.2m.

In September 2006, Outsell analyzed Jordan Edmiston's (JEGI) M&A data and findings which were presented at Outsell's 2006 Go! conference, spotlighting revenue multiples for information companies mostly centered around 2.5 x revenue for online information companies. JEGI's database showed EBITDA multiples of 10.3 to 17.0 for the same types of companies. Outsell noted JEGI's estimate of $300 billion in Private Equity capital looking for targets as a key reason OutSell expected the strong seller´s market to continue.

Outsell says publishers cannot escape Private Equity fueled bidding wars for mature, established information companies, as the pitch of the auctions rises to levels no longer supported by traditional M&A calculations. And if you add the inflationary pressures from Venture Capitalists and Private Equity firms, and from search giants Google, Yahoo! and MSN who have been driving up the prices for interactive marketing companies DoubleClick, RightMedia and aQuantive. Outsell expects future key acquisition targets like behavioral targeting firms Tacoda and Revenue Science to be snatched up very expensively at any moment. Perhaps the ultimate behavioural targeting firm Experian, may become a Private Equity target?

Given that B2B publishers need to transition revenues from print to online, they will not be able to outbid Private Equity firms for attractive online businesses. The result is that for many, organic growth and partnerships are becoming the only realistic options. However, organic growth, particularly in an online environment requires large capital expenditure on software licences, hardware, maintenance, skilled IT staff (where wage levels and skill shortages are rapidly forcing up costs) – all of which result in a problematic ROI. Also publishers tend to outsource these problematic areas - how many publishers actually own the printing presses to produce their print titles? So perhaps the answer for B2B publishers to grow their online businesses is to partner on a revenue share arrangement.

Convera are now partnering with a significant number of specialist B2B publishers, including UBM, Incisive Media, Nielsen, John Wiley, Centaur Media and Euromoney to create a range of vertical websites for specific professional communities. The first example of this is Searchmedica.com with UBM.

Convera have two large data centres, an extensive web spidering capability, a web index and a very experienced team who have built similar search systems for a number of US and UK Government clients. In building the deep vertical search portals, the key is to reach into the specific professional community in a number of ways. First, you can combined the trade publisher's knowledge and contacts in the profession with community appeals that engage the specific audience in a way that general search cannot, and also by taking special care to use the taxonomies common to the targeted profession in organizing search results so that the user feels more at home and among peers. Building a good vertical engine can be costly and time consuming, and getting a critical mass of users to de-Google their search habits into more specialized engines is potentially a tough sell. However, in tests with focus groups from different professional communities to test these vertical search properties against Google, the results are hugely encouraging.

A number of publishers are actively assessing the potential of adding social networking to the mix in order to get professionals interacting with each other and adding weekly podcasts by industry experts on issues affecting the community – these additional services will create more community loyalty and also additional advertising and sponsorship opportunities. Typically these niche vertical communities contain 20,000+ unique and named end user professionals who are stable and affluent – ideal for publishers to monetise through sponsorships and tenancies and excellent demographics for media planners and buyers to target high value CPM campaigns.

 Posted by :Andy Black | June 1, 2007 1:15 AM