Digital Media M&A: Deal Flow Increasing Fueled by Falling Interest Rates

By: Christiana Sciaudone

Get ready for digital media M&A to heat up now that interest rates are starting to come down in the U.S. Just don’t expect the free-for-all flurry of the pandemic era. 

Demand outstripped supply of quality assets during the pandemic, leading to the likes of Industry Dive, Axios, The Athletic and Politico changing hands for hefty amounts between 2021 and 2022. That led even middle-of-the-road assets to seek higher—if undeserved—prices, and sellers refused to settle for less. Throw in what were elevated interest rates before the Federal Reserve took action earlier this month, and buyers became hesitant to take on risk. 

But now that lower rates may be whetting the appetite of dealmakers willing to pay more, sellers will have to rethink their valuations to push deals to completion, said Dan Pitchford, chief executive officer at Collingwood Group, which provides business advisory services.

The advertising market has also been conservative, putting more dollars into assets with premium brand recognition and less into digital media that is reliant on SEO, Google search and paid traffic, said Michael Hirsch, managing director at JEGI Clarity, an M&A advisory firm. Lower interest rates will also help strengthen the advertising market, helping to boost the bottom lines of lesser-known properties.

“In addition to the operating environment improving, as rates come down, the cost of capital comes down, and as the cost of capital comes down, that gives buyers the ability to pay more than they otherwise would have, so it could drive multiple expansion,” Hirsch said. 

Jacob here… I’m excited to run this piece because I know the M&A markets have been something many operators are thinking about. Are deals getting done? Who is transacting? What valuations? The reality is, there’s been a ton of uncertainty. But as this piece will show, things might be changing.

To dig into this beyond this piece, join us on October 15th at the AMO Summit where we’ll be doing a deep dive on the state of media M&A. Paul Miller from Questex, Robert Gray from EagleTree Capital, and Daniel Pitchford from Collingwood (quoted in this story) will be speaking. Plus, Adam Shaw from Collingwood will be presenting some proprietary research.

You won’t want to miss it. Register here. Now for the rest of the piece.

Expectations, Shaping up

It’s not just about the rate drop this month, either, said Adam Shaw, an M&A advisor at Collingwood, although the larger-than-expected cut helped. About 15 months ago, the market expected the high rates to go down quickly and they didn’t.

As Shaw explained, seeing interest rates coming down is giving people more certainty that they’ll continue trending lower. “They’re starting to price in that sooner expectation in terms of interest rates coming down. Interest rates coming down is much better for assets, because the debt cost becomes more manageable.”

The Fed’s projections show another 50 basis-point cut by December, and with that expectation, buyers can start factoring that in financially.

Collingwood’s corporate finance side has already seen business picking up with companies performing better this year than last—another bank A Media Operator reached out to for this piece couldn’t chat because they had so many deals in the works.

“Performance will mean we’re in a better position to be able to think about selling or raising money, or liquidity because we’ve got a bigger EBITDA number and we’re showing that we’re forecasting higher growth next year as well,” Pitchford said. “That means there’s the right things happening on the sell side, and there’s also potentially more opportunity on the buy side, given the economic environment too.”

Specifically for B2C digital media businesses, with few large consolidators like Ziff Davis, Future PLC and Valnet—which aren’t trading that highly themselves—there may be fewer options for dealmaking, Hirsch said.   

“If you’re a buyer and you’re not trading at 10 times, you’re not going to be able to buy an asset for 10 times, right? You have to pay lower. So there’s not a ton of buyers on the strategic side,” Hirsh said. “And private equity hasn’t seen enough good exits over the last several years to make them aggressive to wanting to get into the [b2c] space.”

Those businesses that aren’t considered to be premium yet need to shape up and show sustainable, high-growth earnings and a more profitable revenue stream, with higher value clients and a differentiated value proposition, Pitchford said. 

“It’s not dressing them up any differently, it’s doing some real work on what levers they need to pull to increase the value of those companies. And that’s not a three month project. That’s the 18 months, 24 months, 36 months, work to shift, really turn the dial on,” Pitchford said. Accordingly, the consulting side of Collingwood has been very busy.

The Elephant in the Room

A major change that has happened since 2022 is the advent of artificial intelligence, and the impacts remain a mystery. 

“That’s top of mind for every investor, how is AI affecting and going to affect your business,” Hirsch said. “One risk that folks are having a hard time underwriting is the risk that some sort of AI search or Google Search gives the reader the answer, and then the reader never has to go to the publication, and that’s going to decrease monetization opportunities.”

Ad-funded media businesses are more prone to that than subscriptions, which are more gated, Pitchford said. 

To mitigate the AI risk, companies may have to rethink their strategies and give their audiences utility and tools, providing them with reasons to return to websites organically and not just by chance. 

Hirsch cited Apartment Therapy as an example of a website with utility, including tools to navigate home furnishings, decoration and recipes. 

“Advertisers are going to want to target that engaged audience that is finding utility in your website, that is being talked about a lot more now than it was when the cycle peaked,” Hirsch said. “Folks in the M&A market want to see assets that diversify away from the reliance on SEO.”

“It all starts with the content. It all starts with the utility that should drive audience. And once your audience gets big enough, advertisers are going to need to target them,” Hirsch said.