Cautionary tales from heyday of leveraging

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Beneath the optimism surrounding the resurgence of the mergers and acquisitions market in b-to-b media there is an unspoken sense of caution. As bankers are making financing more readily available, the mild trepidation in the market is evident in how today's buyers seem more aware than some of their predecessors were of a sometimes frightening four-letter word-debt.

When the technology market went south in 2000 and it become apparent that Internet plays wouldn't generate profits as soon as some people hoped, aggressive buyers such as Penton Media, Primedia and Ziff Davis Media found that the blessing of leverage had become a curse. For b-to-b executives today, the experiences of these companies serve as cautionary tales.

"I think leverage is just a philosophy," said Cameron Bishop, CEO of Ascend Media, which is backed by JPMorgan Partners and Veronis Suhler Stevenson. "Some people want to push it to the max; we don't. We take a more conservative view of leverage. We are not and will not push it to the limit."

David Nussbaum, who took over as CEO of Penton in June, said buyers today are more grounded in the current performance of potential acquisitions-not pie-in-the-sky hopes of future performance. "You don't buy high concept, and you don't buy vision," he said. "Rather, you buy a good, solid business backed up by a proven strategy."

Penton made some ill-advised deals at the height of the dot-com frenzy. It spent $274 million for Mecklermedia in 1998, but by 2001 that company's key properties, Internet World and the affiliated trade shows, were struggling. The $65 million base price Penton paid for Streaming Media also damaged the company's balance sheet.

Penton's leverage problems have forced former and current management teams to focus more on shoring up the balance sheet and less on growing the business. Under Tom Kemp, Nussbaum's immediate predecessor, the company executed some creative financial engineering maneuvers that restructured its debt and enabled it to continue.

Although most observers say the company has made significant strides, the bulk of its $12.1 million of EBITDA in the third quarter of 2004 went to cover the $9.7 million it owed in interest for the period.

Led by former CEO Tom Rogers, Primedia was another company enamored of new technology and willing to go into debt to stake out a presence in the space. To shore up its balance sheet, it sold a number of high-profile consumer properties, such as Modern Bride. It also changed CEOs, installing Kelly Conlin in 2003.

After slashing staff and selling other properties, Primedia has strengthened its balance sheet. Its $60.0 million in EBITDA in the third quarter offered some breathing room for its $43.2 million in total interest payments.

Ziff Davis is another prominent b-to-b media company saddled with long-term debt-$286.2 million. Shortly after Willis Stein & Partners paid $780 million for the company, it became apparent that Ziff Davis, staggered by the tech wreck, couldn't meet its obligations to its bondholders.

Behind CEO Robert Callahan, Ziff Davis forged a much-lauded agreement with those bondholders that kept it out of bankruptcy court. It also cut costs, focused on the Internet and even made some small acquisitions. Still, while it generated $6.5 million in EBITDA in the third quarter, it had $23.6 million in interest obligations for the period.

With such cautionary tales, today's buyers may think twice, but that likely won't prevent them from making deals. Many believe that the tech collapse, coupled with the Sept. 11 terrorist attacks, created a once-in-a-lifetime economic maelstrom.

Others say they're being more astute and cautious buyers than the companies that got into leverage trouble. TechTarget, which recently paid $40 million for Bitpipe, has been an aggressive purchaser. CEO Greg Strakosch said TechTarget was making prudent deals, unlike some earlier M&A activity. He cited the example of Penton, saying, "They bought at the high end of tech valuation, and they overpaid considerably."

Indeed, most observers don't believe the events of the past will scuttle any deals. The benefits of leverage, as any homeowner with a mortgage knows, are often too enticing to resist.

"I can't say that I think people are going to turn away opportunities for leverage," said Reed Phillips, managing partner at media investment bank DeSilva & Phillips. "I think they will have that in the back of their minds. They may be a little bit more conservative but not a lot more conservative." 

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