October 3, 2023

Being #1 in a Market Matters in M&A

Today’s piece is going to be a fun one because it really digs into something many AMO readers care a lot about: deals. We also explore the growing advisory business at Skift.

If you want to hear CEO Rafat Ali talk about this new business plus how Skift has grown over the past 10+ years, buy your ticket to the AMO Summit today. It’s a full day event on October 26th here in NYC for 125+ people. I’ve only got a handful of tickets left, so if you want to come, act fast.

Running a media business is a lot of work. And as you continue to sell more advertising campaigns or grow your subscriber base, things can often get more complicated. It’s basic human nature. 

That’s why Omeda is such a powerful tool specifically built for media companies. The software is designed to help teams simplify their workflows, making it easier to operate the business and drive additional revenue growth. 

If you’re seeing growth with your publication and are interested in expansion without having to overcomplicate your business, sign up for a demo today.

Investors prioritize leader in a market

There has been a pullback in M&A activity over the past twelve months compared to the previous twelve months. According to a new M&A report by Collingwood Advisory, the “market over the last 12 months has seen 93 transactions, compared with over 130 in the prior 12 month period.”

Despite this pullback, though, healthy deals have still taken place. But one major trend is starting to show for buyers. According to the report:

Overlaying this with respondent feedback on deals they participated in over the last 12 months, the theme was a flight to quality, with those outside of the ‘market leader’ category often not transacting at all. Most respondents are gradually increasing budget, or are hoping to increase budget over the coming period.

Being number one is unbelievably important to buyers. And it has shown in deals, with the leading player in their respective markets having had opportunities to sell, while those that were fighting for a smaller piece of the pie couldn’t even get an offer.

A big reason for this is because of how much stickier revenue likely is for the brand that leads a market. This part starkly jumps out to me:

The macro environment has led to lower overall deal volume and bifurcation in valuations between top tier and other assets. PE appetite is as strong as ever for assets with leadership positions and strong net revenue retention (>115%). Notable deals include Motive Partners’ acquisition of With Intelligence and Mintec’s acquisition of AgriBriefing.

I would argue that a leadership position is coupled with strong net revenue retention. In other words, the leader is able to not only retain all of last year’s revenue, but see healthy growth from those partners. Contract expansion is a great sign that partners see value in working with the brand.

It reminds me of a story a publisher told me once. At the close of the company’s major event, his sales team would walk around the trade show floor and get people to renew for the next year’s event. Most of the floor space was sold out within weeks of the close of the event, which is obviously an enviable position to be in. But that really only happens when you are the leader in the market.

One major reason for this could be what prospective buyers view as the top characteristic of a valuable business: recessionary resilience. In other words, investors want to know that if a recession happens—which always seems to be right around the corner—that the brand can withstand it. If marketing budgets got cut by 25%, would that money come from the leader or from smaller, more experimental tactics?

Not only is recessionary resilience important, but there is an increasing focus on the quality of the actual product, aka the content. According to the report:

Strong editorial is a fundamental characteristic of high value businesses. B2B audiences engage across multiple content sources and formats with industry-focused digital publications and newsletter most frequently used. There are opportunities to leverage quality content to engage audiences, and address currently underserved audience needs.

With how much competition there is on the internet and the ability for audiences to quickly move from source to source, it has never been more important to put out a product that retains them. What the report finds is that there tends to be a direct link between the quality of the editorial and the value of the business.

If we really interrogate that, it makes perfect sense. Gone are the days when you can publish subpar information and expect that your business is going to thrive. None of the publications that Industry Dive or Morning Brew launched were in net new verticals; we just happened to create better content than the competition and quickly acquired and retained an audience.

The makeup of the leader in an industry will be a brand that is both producing exceptional editorial and is seeing net revenue retention of 115% or above.

We’re also seeing a divergence between brands that are primarily advertising-based and those that are able to offer more in-depth marketing services based on specific audience segments. You didn’t actually think I would get through a piece without mentioning 1st-party data, did you? But it’s true. And this is especially relevant to newsletter operators, because much of what we do is still standard advertising products. We are going to need to develop products that target segments of our audience more specifically.

What does that mean in practice, though? Let’s use Digiday as an example. If you really look at their audience, you can break it down into three buckets: agencies, brands, and publishers. In other words, the three participants in the advertising ecosystem. But within each of those buckets, there are likely a number of segments. In publishers alone, there are streamers, b2b, consumer, podcasters, etc. Each of those segments might have advertisers looking to target them specifically. Publishers that are able to use 1st-party data and create targeted campaigns have an advantage over those that are simply selling display or non-targeted advertising.

One final point is worth exploring and that’s the relationship between the size of the business and the multiple. The bigger the business, the better the multiple. For example, a marketing services-oriented company doing sub-$1 million in EBITDA would be valued at 8x EBITDA. But get to $3m+ in EBITDA and the multiple would be 12x.

While things have certainly slowed down these past 12 months compared to the previous 12, the reality is that buyers are still interested in buying if you are the leader, can offer more in-depth audience data, and have reached legitimate scale.

Consulting as a line of business

When we discuss various revenue streams for media businesses, the common ones discussed are advertising, subscriptions, events, and other variations of this. But launching a consulting or advisory business is not often up there. But this is exactly where Skift, a media company for the travel industry, is expanding. According to tweets from CEO Rafat Ali:

I am so excited to announce Skift has acquired the premier tourism consultancy Twenty31 to expand our fast growing advisory capabilities.

This is the 5th and largest acquisition we have done at Skift, and strategically rounds out our business with editorial, research, events, marketing services and now deeper into advisory business.

And if we look at how Skift makes money, it has historically been branded content, events, and subscriptions—both for research and its daily news operation. Now, it has a fourth revenue stream: consulting.

When I asked Ali what the immediate go to market plan was, he explained that Twenty31 already has a good pipeline of work, but also sees many of Skift’s current partners as prospective clients.

But it’s one thing to expand into this sort of a business and it’s another for it to actually work. When you stop to think about it, it actually makes a lot of sense.

Skift was founded 11 years ago. Google has 68,400 pages on Skift’s site archived in the SERPs. According to its site, it has published over 41,000 stories. That’s over 300 stories per month all about travel. Who is more qualified than Skift to have a deep understanding of that topic? Clients are willing to pay for this expertise.

Ironically, this goes back to the main point in the previous section: leadership. I don’t know the travel industry well, but I would argue Skift likely leads that industry. And therefore, its brand carries incredible weight when it comes to proving that leadership—something you want to see when hiring a consultant or advisor.

Branded content, events, subscriptions, and now consulting… Skift is able to serve its audience multiple ways and generate revenue doing it. This is how all media companies should be looking to build their businesses. Develop a strong brand and then monetize in diverse ways.

Thanks for reading today’s AMO. Have any of you introduced consulting or advisory services at your publications? Hit reply. A couple of quick points:

  1. Like I said above, there are only a handful of passes remaining for the AMO Summit. This event is going to be a sell out, so if you want to attend, buy your ticket now.
  2. Become an AMO Pro member to start receiving the Friday newsletter, an invitation to the AMO Slack, and first access to future events. If you buy a Summit ticket, by the way, you get one year free of AMO Pro.

Have a great week and I’ll see you next week!