Higher Margin is the Name of the Game for M&A
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As I was preparing to write today’s AMO, I realized something. Tomorrow A Media Operator is turning four years old. I don’t have kids, so I don’t know what this means from a development perspective. But according to Scholastic, a four year old is considered a preschooler. So, that’s cool. Happy Birthday, AMO!
I have a lot of exciting things coming up in this preschool era of AMO, especially for AMO Pro members. So, sign up today!
When we think of growing revenue, we often focus on acquiring new users. And that’s certainly important. But I would wager that for most publishers, there are a ton of current readers that you could better monetize.
A key way to do this is with recirculation. In essence, recirculation is about increasing the amount of additional pages a reader visits on your site. Each additional page increases the chance that a reader becomes a paying subscriber or engages with an advertisement of some sort.
In this guide, Omeda has broken down five ways that publishers can boost recirculation on their sites to increase stickiness with the reader and grow revenue. The ultimate goal is to create more personalized experiences using their CDP.
Check out the guide and then set up a demo with Omeda.
Interest rates cool media M&A
If 2020 and 2021 were year of heavy transaction activity, 2022 and 2023 have been much quieter. But in many respects, it makes sense.
In March 2022, the Federal Reserve started to increase interest rates to combat inflation and we got early signs of what a spooked ad market might look like. No one wants to be taking on a lot of debt going into a high-interest rate environment, am I right, David Zaslav?
A couple of consultants wrote an interesting piece on INMA about what is driving media valuations.
Valuation multiples have also dropped over the last year: The digital media index is down from 2.4x enterprise value to revenue in March 2022 to 1.8x in June 2023. Even privately held digital media companies have been forced to market at levels well below their prior valuations, including Vox (US$500 million in 2023 vs. US$1 billion in 2015) and Vice (US$350 million in 2023 vs. $5.7 billion in 2017).
While the S&P 500 has mostly returned to Jan 2022 prices, the “Digital Media Stock Price Index” and the “Newspapers Stock Price Index” are still down 40%. The reality is, investors are not clamoring to acquire media assets right now, whether private or public.
I think the more interesting narrative right now is tied to interest rates. When interest rates were much lower, it was significantly easier to borrow money to buy companies. Back in May 2022, I spoke with Chris Ferrell, CEO of Endeavor Business Media, on the AMO podcast. At the time, he had already closed on eight deals that year. On the podcast, he said:
And then you ask for the right amount of money for the size that the lender wants to lend. And so if you can line those things up, what amount of debt that a fund or a bank is willing to do and what ratios they’ll lend to? We’ve had great success in putting the right amount of debt on a deal. The nice thing about the small B2B media companies is that they trade at multiples of EBITDA. Everything I buy, I buy on a multiple of EBITDA based on what the revenue mix is and the trends that they have. And then I use part of it as equity essentially from our profits and then layer in bank debt or seller debt that I need to complete the deal. And so it lets me use leverage to really ramp up the company quickly.
But the right amount of debt you can put on a company changes when interest rates go up. In the case of Endeavor’s business, it has actually mostly stopped making acquisitions because of interest rates. I emailed Chris to ask about this and he said:
Rising interest rates have definitely slowed our pace of acquisitions. Primarily because we need more of our operating profits to cover current debt service, I have less cash on our balance sheet to apply to new transactions. If we have to borrow or raise additional funds to complete an acquisition it changes the analysis of what makes sense for us to do. In a high interest rate environment, it often makes more sense to use profits to retire existing debt. In this environment, an acquisition has to be a pretty compelling transaction for us to move forward.
To put numbers on that… Let’s say that he bought a company in January 2022 for $6 million and he decided to use $2 million in debt for it. Let’s say interest rates were 4% at the time and he had 10 years to pay off that debt. His monthly payment would be approximately $20,250. In other words, he would be spending about $243,000 per year in debt.
This isn’t a problem so long as the business is kicking off more cash flow than the $243,000. But where it becomes a problem is when interest rates go up. Let’s assume that interest rates have increased 3x and are now 12%. Now it’s costing him $28,700 per month. That’s $344,000. And so, because the Federal Reserve increased interest rates, he has another $100,000 in cost on his books.
Now I am not concerned about whether Endeavor Business Media is going to be able to handle this debt. It has historically been a 30%+ margin business, so if debt payments pull that down somewhat, it’s going to be fine.
However, what do you do with a business that might have only been a 5% margin business with debt on its books? Suddenly, interest rates increasing from 4% to 12% can be the difference between profitability and burning cash. That’s where things can get very dangerous.
And so, if you’re a buyer, you now have to sharpen your pencils a little more to make sure that the deal actually makes sense. That naturally reduces the buying pool, which puts pressure on the multiples for deals.
But what it also means is that the media companies with the most optionality are those that are incredibly profitable. If a buyer is going to borrow money at a double digit interest rate to buy you and you’re kicking off 30%+ margins, they’re likely going to be able to service that debt far more efficiently than if you are generating less cash.
The businesses that thrive in a high interest rate economy are going to be those that understand how to actually make money. Low margin (or no margin) media companies were a zero interest rate policy phenomenon. Those days are long gone. Welcome to the real world.
Speaking of media M&A. At the AMO Summit in NYC on October 26th, we’re convening an amazing panel with different participants of the M&A ecosystem.
- Dennis Berman, Managing Director at Lazard
- Chris Ferrell, CEO of Endeavor Business Media
- Maureen Sullivan, Partner at TCG
I am really excited about this discussion because they each have very unique perspectives.
We’ve already sold over half of our tickets and prices increase in September, so if you’re interested in attending, register today. You get a free year of AMO Pro included in your ticket purchase. I can’t wait to see you there!
B2B events are on a roll
Bizzabo has a great report on The State of In-Person B2B Conferences that is definitely worth looking into. A few things jumped out to me that I wanted to share:
In-person B2B conferences are back in a big way, and attendees are here for the resurgence. An impressive 42.7% of respondents attend one to four events and 39.6% attend five to nine events annually. According to responses, attendees actively attended in-person events last year: 53.3% of respondents say they’re attending “about the same” amount of in-person events this year as in 2022. On the other hand, 31.7% say they’re planning on attending more this year.
More than 2,300 attendees participated in this survey and 77.7% of respondents “agree or strongly agree that in-person B2B conferences offer the best networking opportunities.”
There are a few things to glean from this. First and foremost, attendees want to be in person. But it is on the event organizers to ensure they are facilitating that networking. I’ve been to events that are so jam packed with content that the only time people can actually talk is at lunch or during a 15 minute coffee. We may have a story to tell, but our attendees are there for more than just the content, so it is important that we provide the opportunity to talk.
One other point was on venues. According to the report:
Venues were a key theme throughout the survey for organizers and attendees alike. Venue selection fell in the top three major pain points for organizers, and respondents commented about facing a variety of venue challenges. According to 64.6% of attendees, a conference venue can make or break their experience.
Venues are hard because you’re often limited by your size. When I was at CoinDesk, we were in the Marriott Marquis, which is a unique experience. But we quickly grew out of that and basically had three choices: Hilton Midtown on 5th Avenue, the Javits Center, or going totally custom on the river. None are great if you ask me.
When I was picking the venue for the AMO Summit, I had a lot of options. There are Convenes all over NYC that are really straightforward. There were a couple of other independently owned spaces, but would have required a lot of build out to make them work. I chose the Paley Center for Media for three reasons. First, I’d have total ownership of the space, so I wouldn’t be competing with other people. Second, I liked the built in theater. And third, it felt tangentially related to AMO.
One area where it’s obvious that event organizers are lacking is with virtual. According to the report, “…only 3.8% of respondents provided recorded on-demand content after the event.” This is a massive miss. You are creating a ton of high quality content. Why wouldn’t you want to package that up? One theory could be a fear that people won’t buy tickets if they can get the content for cheaper online. And that’s possible. But we already saw that many people are interested in events because of the networking. Are they really not going to buy a ticket because they’ll get to watch it on screen after the fact?
What is obvious is that b2b events are cruising now and people want to be face to face. According to Skift:
The number of U.S. consumers planning to travel for business is up significantly year over year, from 29 percent in July 2022 to 51 percent, according to the research. And 39 percent of respondents said they plan to take a business trip in the next 12 months, up from 32 percent in July 2022.
Those people have to go somewhere. Why not an event?
Thanks for reading today’s AMO. If you have thoughts, hit reply or become an AMO Pro member to join the exclusive Slack community. As I said above, get your ticket to the AMO Summit (comes with an AMO Pro membership) being held here in NYC on October 26th before prices increase in September. Have a great week!