BY SEAN CALLAHAN
When the McGraw-Hill Cos. announced last week that it had agreed to acquire marketing information firm J.D. Power & Associates for an estimated price of $350 million to $400 million, the move puzzled some observers.
"The two main acquisitions last year were clear strategic fits [Capital IQ and Grow Network], while the J.D. Power acquisition is not as obvious a strategic fit, in our view," said a report written by Lauren Rich Fine, first VP at Merrill Lynch, and others at the investment firm.
Other observers, however, saw McGraw-Hill making a move resembling its 1966 acquisition of Standard & Poor’s, which provided momentum for the corporation’s transformation from a publishing operation to an information-based company.
"I think it’s the kind of thing that McGraw-Hill can run very well," said Robert Crosland, managing director at media investment bank AdMedia Partners.
"They have a lot of ways they can leverage the J.D. Power name in vertical markets. Essentially what they are is a ratings business, which McGraw-Hill is very familiar with through Standard & Poor’s."
"I’d love to draw that analogy," said Scott Marden, president of McGraw-Hill’s information and media services unit, into which J.D. Power will be integrated. "This is the first significant brand we’ve acquired since we acquired Standard and Poor’s."
Currently, J.D. Power generates about $150 million in annual revenue, selling its ratings data to consumers and businesses. The company made its name collecting ratings information in the automotive industry. Today, about 65% of its revenue still originates from the automotive sector.
J.D. Power has expanded, though, to serve the finance and insurance, health care, construction, telecommunications and energy industries. The Westlake Village, Calif.-based company said it will begin conducting customer satisfaction surveys of the after-sales service and support of technology products.
J.D. Power has also expanded globally and now generates 22% of its business from overseas, with about two-thirds of that coming from Asia.
McGraw-Hill’s information and media services unit intends to leverage these capabilities.
"In the McGraw-Hill Cos., we have found an ideal partner that will provide our firm with the best opportunity to extend J.D. Power & Associates’ reach globally and into new vertical markets," J.D. Power III, founder of the firm, said in a statement.
Marden sees opportunities to sell marketing information to businesses served by BusinessWeek as well as McGraw-Hill’s construction, aviation, energy and health care publishing and information units. For example, he said McGraw-Hill could sell J.D. Power-branded marketing information on consumer satisfaction with homebuilders in its construction group or information on airlines in its Aviation Week unit.
Although some observers consider the price McGraw-Hill is paying for J.D. Power to be high, they acknowledged that the company’s outlook is long term and that it intends to integrate J.D. Power for the long haul. In the short term, McGraw-Hill estimated that its acquisition of J.D. Power and two smaller businesses, Vista Research and ASSIRT, will dilute its earnings by about 6 to 7 cents per share this year and 3 cents per share in 2006.
McGraw-Hill’s share price has declined slightly since the announcement of the J.D. Power deal. On March 7, the day the deal was announced, the share price closed at $95.40. On March 14, the share price closed at $89.25.
Despite her initial reservations, Merrill Lynch’s Fine said the deal ultimately makes sense, especially considering McGraw-Hill’s track record with acquisitions. "We do not view this acquisition as a natural extension of [McGraw-Hill’s] existing assets in the information and media segment; rather it seems to signal an intention to expand in the marketing information area," she wrote. "If so, this would answer the often-asked question of what [McGraw-Hill] would do to build up its information and media segment, the smallest of its three segments."
The other two segments are Standard & Poor’s and education.