Moderator: Lee Greenhouse, President, Greenhouse Associates, Inc.

Panelists:
Dr. Howard Lee Morgan, Partner, First Round Capital
Mike Tansey, CEO, Jobson Medical Information LLC
Tim Weller, Group Chief Executive, Incisive Media
John S. Suhler, Founding General Partner and President of Veronis Suhler Stevens

Greenhouse: Is there really a post-froth period?

Suhler: In last five non-consumer transaction amount of credit and cost of credit not so much different from January of last year, more covenants rather than covenant-free, more take-private deals than IPOs.

Tansey: John's right in that cost of debt is up a bit but availability of debt is not there, no syndication to speak of, more mezzanine financiing.

Weller: Lots of froth, bank syndicated our first tranch of debt, but harder for new tranches. Market goes through peaks and troughs, more points, more creative in how they're accessing capital.

Morgan: Raised a lot of capital last year for deals, did 36 acquisitions, smaller companies can be rolled up and acquired, fewer exit outlets so rollups are attractive. We did well.

Suhler: Two times in last 25 years where markets were stuck, we're not in that situation today, froth doesn't invite or stop deals, still a market to invest in great managers and great products, you'll ride right through that. Deal attractiveness is not a froth or lack of froth factor, buy companies through cycles. If you do it right management teams will blow right through trends. We don't buy based on froth coming or going, doesn't determine long-term investment value.

Greenhouse: What is it about information businesses that have made them attractive?

Suhler: Business information companies have growth rates aren't greatly accelerated or decelerated by consumer markets EBITDA tends to be at a premium to consumer media, high teens, low twenties, sometimes certain areas have had peak prices, but long term slightly better growth for their portfolio.

Greenhouse: Is it less expensive to start an information company today?

Morgan: Absolutely, some initial investments were 300K, some down to 200K, an enormous you can do with a lot less money.

Weller: Thirteen years needed half a million in capital, floated for 150 million a few years ago, spend far too much time at what we don't do well, we're a very creative industry, can adapt fast, have evolved a lot, monetizing effectively, little to no capex, lots of cash comes back.

Greenhouse: Differences between consumer and professional?

Tansey: Less expensive to create consumer products, but cost of acquiring audiences can be high, have to create both audience and community.

Morgan: You can use Google AdSense to create a business for your content overnight, then you can build a sales force to skim off the cream. Have to do more work on the ad side to create a business that's monetizable.

Greenhouse: Audiences want data in workflows, lots of individualized workflows, core technology may be cheaper but adapting it is a greater burden. Is there some counterbalancing effect?

Morgan: Not really, web services lowers costs, easy to adapt and implement, on Wall Street high-speed hedge funds use low-latency feeds, information is quickly repurposed.

Suhler: in 1980s you packaged information, sold it and you were done. Didn't hear about workflow integration. Glocer's presentation was combining information and services always. Costs money to build applications and services for users to interact with, cost of building audience doesn't change, building services that will keep renewal rates high is tough duty. In B2B trade world ads can float some of that cost, but harder to integrate advertising and sponsorship into workflow applications.

Weller: Our advantage is skillset for online piece, takes time and resources and intellectual capital, we've bought very good people at right rate. But we're not enough in the workflow [comment: B2B trade media is in big trouble, not sure that this is really the year that it will turn the corner but they're start]ing to get it].

Greenhouse: Changing technology, sometimes disruptive, is that a driver?

Morgan: In shrinking markets, can offer sustainable margins.

Weller: Content should drive strategy, not technology [comment: see our definition of content].

Tansey: The disruptive thing is understanding your customer better.

Suhler: Management teams that don't "get it" can be disruptive. Our greatest concerns have been where the management team get it right, didn't have the sensitivity to get the right technology in place at the right time.

Morgan: Companies like Google are disruptive as they surface information faster and oftentimes good enough free information. Knowing what customers need is very critical, have to think like customers, what would they find on Yahoo or Google.

Greenhouse: Thomsons and Reed Eleviers have built empires, where are the empire builders of the future?

Weller: Into making money for myself and management team. Google frightens, but startups that live and breathe their customers are a bigger threat. Apax have incredible aspirations to build a sizeable B2B company. Looking at Outsell numbers, we'll be number 3 B2B soon.

Suhler: Have added 300 acquisitions to our initial 50. Empire building is making sensible acquisitions that provide benefits through mergers, to use existing scale and presence and skillsets. "Empire building" is senseless in and of itself, it's about building margin and revenues. 25 percent of our return has come from add-on benefits of acquisitions.

This as a good session, seemed to run a little long on too few real topics, but the panelists had a lot of great insights. Investors are managing still to find good value in the marketplace that fits the best strategies and that will continue, especially as young companies listen carefully to their clients. Unaddressed: how to continue margins as older media revenue streams dry up and newer ones yield less on an ad/subscription model based on older methods. I am not sure that the investors have the 3-5 year models in place to predict basic benchmarks such as cash flow and earnings effectively as these transitions take place. I think that there were a lot of important points raised by John Suhler about emphasizing the quality of management teams, but I wonder whether those teams are always going to be able to turn these new corners quickly enough. There's enough "give" in these portfolios to weather the transition overall, and already a fair amount of revenue stream adaptation, but it's going to be an interesting 3-5 years for B2B media. I think that M&A will continue to have a pretty good year but it's going to get harder as the purchasing companies see their fundamentals impacted by slowing traditional revenues.

Labels: deals, mergers and acquisitions, SIIA Information Industry Summit 2008

Mitch Rouda moderated a panel of financiers and media companies who laid out the case for digital operations supporting company valuations. Prime concern pointed out by Peggy Koenig, Managing Partner of Abry Partners: without them barriers to entry in a given segment are low. Tad Smith, CEO of Reed Business, is generally trimming his portfolio but keeps an eye on online-only plays and swapping titles - but he's not looking at print. "Print is in a gentle state of decline," Tad notes, so it's up to the other assets to make the case for a sale. Jay MacDonald, Managing Partner for DeSilva and Phillips, focuses mostly on online deals, but looks for companies plugged into the right environment. Jay notes that there's a perception that online companies have higher multiples, but multiples are well spread, 7-16x EBIDTA. In online businesses EBITDA ratios may be actually lower, though revenues may be higher. Charles Engros, Partner for Morgan, Lewis & Bockius has been focusing on the consumer space recently with deals for NYT, Pearson and eBay/StubHub, buy in general large media companies are always looking for strategic fits for cash flow. Charles outlined an engineering-related acquisition with online tools for specific engineering problems as well as auction vehicles and had created a virtual market in the engineering community that offered great growth opportunities.

RE models that add to valuations: the future is in ecommerce, lead generation and community enhancement, according to Charles. Peggy notes the value of proprietary digital products as another valuation driver, as with platforms in enthusiasts in coin collecting to put their collections online and create a specialized trading systems. Tad looks at growth, predictability, cyclicality, seasonality and defensibility to make sure that revenue characteristics match overall revenue and earnings expectations. Jay looks at profitability, growth, size, revenue, diversity by industries and products, share of market and online profile or plan.

Mitch: How hard is it to move revenue online? If there's a locked connection with an audience why does it matter where they are? Tad: was a little harder in earlier Web days when the certainty of being able to generate revenues online and consistent usage was lower. Peggy: perception is reality, print advertising is not growing, audiences have migrated online, need to build revenues there, lots of blocking an tackling. Robustness is determined by revenue, not earnings. Mitch: well, why not park all of my revenues online and merchandise print? Peggy: Cygnus has a growing online business but a much smaller percentage of online revenues. Jay: Internet provides an opportunity for a much broader audience, 90 percent of online readers were not readers of magazine in OS data. The Web provides a measurable new audience that can be monetized. Jay: you can do so much more online with tools that can help you get people to pay for things.

Mitch: How important is registration for online revenues? Charles: very important. Peggy: need to make sure that people are qualified registrants. Mitch: we're faced with a choice, do we go for high numbers or qualified numbers? Peggy: depends on who you're trying to reach. Tad: progressive registration can work, trade "goodies" for more information.

Question: you look for strong management teams, how important is it to keep a team for new owners? Tad: not sure that it's terribly important to have synergies on basic staffing functions, but on management it's important to have retention elements if you don't have internal managers that will be credible to new staff. Charles: sellers look as carefully as buyers.

Question: lower margins online, if the goose that lays the golden eggs is dying, will online margins make for a good investment? Tad: lots of costs go out when you move online.

Question: Share of market, how to you determine it for an online portion of a company? Jay: look at company as a whole, not just online component. If you have zero online now, it may be very difficult to be sold at all now. Prism/Penton deal - Penton worked hard to come back with their online strategy, have a trajectory online that helped with their exit.

Question: Optimal balance between events, online and print? Peggy: would want to have online revenues at least 15-20 percent. Tad: where a company invests says a lot, what does it says when a company decides to move to other media? It may have implications about what they expect from online margins.

Bottom line: don't expect to sell if you were not trying to work hard to get ready for digital media. The train has left the station.

Labels: ABM, Digital Velocity, events, mergers and acquisitions