New York-based Peachtree Media Advisors specializes in the digital media sector. John Doyle, a managing director of the firm, recently discussed the outlook for the media M&A market, with a special focus on digital properties.
Media Business: How would you characterize the current mergers and acquisition market in digital media?
A lot of the transactions in digital media and technology are small capital raises, or they're portfolio companies that have survived the recession and they're doing follow-on capital raises. So even though the volume of transactions is way up, you have to look at what these transactions are. They're pretty small capital raises or follow-on in the $8 million-to-$10 million range, or they're $1 million raised for a startup.
MB: Do you expect M&A transactions to remain on the small side?
Even though the volume is increasing you have to look at the scale. On the technology side, you're not going to see many large, splashy acquisitions. The reality is that companies like Google, even though they've made some acquisitions, made them for less than $100 million—with the exception of AdMob. Google's market cap is about $147 billion. Most of the acquisitions they've made have been less than $100 million, and that's not a lot. If you look at Apple [Inc.], they're also making some acquisitions. Apple currently has a market cap larger than most countries' [GDPs]. They're at $221 billion. They bought a company called Quattro [Wireless Network], a mobile ad network, and they shut it down.
MB: What other trends do you see moving forward?
In the digital media sector, we're going to see a lot more IPOs, and the reason is because there aren't very many buyers for a lot of these companies. You've got the private equity companies that want to exit; they need to return the money back to their investors.
When I'm saying there are no buyers, it's not because these aren't good companies. They are just too big, as in the case of Nielsen Co.—who's big enough to buy Nielsen? Strategic buyers are hesitant to make unproven, large-scale acquisitions. So by the nature of the IPO, you can break up the risk among thousands of investors. That's why you're going to see a lot of exits via IPO. The investors are just going to pinch their noses and hope for the best. The large, traditional buyers of these assets are waiting for the economy to turn around.
MB: How are b-to-b companies—especially regarding their push into digital—handling the current environment?
B-to-b media is at some kind of crossroads or inflection point. It has to decide how it's going to move forward in this digital world. I think that b-to-b content players are going to monetize their digital assets with more lead-gen and on-demand services. The line is gong to blur between content and demand generation. More traditional b-to-b publishers are going to have to start to offer more interactive marketing—with webinars, and white papers and other demand-generation products.
MB: Do you see marketing services becoming a central part of their business?
It's going in that direction, and it's always been there with b-to-b. At some point b-to-b media companies are going to become more like interactive marketing services companies or interactive agencies, as opposed to just writing about the construction business or the IT security business. They're going to be more marketing services providers.
MB: In this transition period, how will M&A activity fare in the b-to-b media sector?
Right now there's still a valuation gap. You have companies that survived the recession, and they're still not ready to sell—not at the multiples that are being offered. &BULL;