Slowing M&A Market Good -- and Bad -- for You

There May Be Fewer Deals, but There Also Will Be Fewer Parties Bidding Up Prices

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NEW YORK (AdAge.com) -- You should have sold last year.

The mergers-and-acquisitions outlook for 2008 appears much more modest than the whirlwind that was 2007, thanks to talk of a recession, bleak ad-spending projections and a credit crunch that may eliminate many financial buyers from the market. Add to that a general perception that anything internet-related is mired in a valuation bubble on track to burst sometime between now and, well, when the "Transformers" sequel comes out.

Oh, sure, there will still be deals, but there will be fewer parties bidding up the prices, and it will be a different kind of buyer. And a dampened market is a good thing for media companies and agencies looking to get a bigger piece of the action.

Cutting back
The crash of the subprime market and the ensuing credit crunch are expected to cause some private-equity types to rein in their massive M&A spending. But strategic buyers, those companies that invest in an acquisition to satisfy a specific need within an existing business, are expected to fill in the gap.

Mark Edmiston, managing director of AdMedia Partners, points to a couple of last year's deals the likes of which won't be replicated in 2008: Ron Burkle's Source Interlink $1.2 billion purchase of Primedia's enthusiast division and the $250 million stake in Modern Luxury Media, which publishes titles that cater to the high-net-worth set, sold to Los Angeles-based Clarity Partners.

"Strategic guys couldn't come close to that price," Mr. Edmiston said. And surveys suggest they will be opportunistic this year.

An AdMedia Partners survey of media executives found widespread pessimism about the U.S. economy in 2008 -- yet 80% of the respondents said they expect their organizations to complete a deal in the next year. According to another survey, this one from boutique investment bank Gridley & Co., 68% of executives in the interactive, marketing-services and financial-technology spaces expect to do a deal, either as a buyer or seller.

Yet the prices they envision are moderate. In the Gridley survey, 69% of respondents in marketing services said they would be involved in a transaction valued at less than $50 million; only 2% suggested they'd be involved in one valued at more than $1 billion. The internet-services space had a slightly higher tolerance for price tags but not much: 75% said they'd be involved in a transaction of less than $100 million, while no one believed they'd be involved in one more than $250 million.

2008 outlier?
One other reason volume may be down in 2008 is if there's no outlier, like there was with aQuantive in 2007.

Michael Petsky, partner at Petsky Prunier, said: "$6 billion of the almost $17 billion in [internet-services] transactions was aQuantive, and the remaining 200-odd transactions accounted for the other $11 billion. I'm confident the volume of transactions will be on par or higher in 2008 than 2007. Whether there's an outlier like aQuantive that will help it exceed the 2007 total, I'm not sure."

To keep it interesting, deep-pocketed internet players remain -- four to be exact. And if you want some direction as to what kinds of prices and multiples will shake out in the internet M&A landscape, look no further than Google, Microsoft, Yahoo and Time Warner's AOL division, advised Linda Gridley, CEO of Gridley & Co.

"The Big Four clearly played a land-grab game in 2007, and they didn't care about prices," she said. And with stock prices mostly up, she said she expects the game to continue this year. "They'll continue to pay for what they need because they've got huge cash and expensive stock, so they can do these deals."

Last April, Google's announced $3.1 billion acquisition of DoubleClick set off a landslide of deals that included WPP's $649 million purchase of 24/7 Real Media, Yahoo's $680 million purchase of an outstanding 80% of Right Media and Microsoft's massive $6 billion aQuantive acquisition. (All of the acquisitions, except for Google-DoubleClick, have closed.)
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