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Home » Useful White Papers » The Desire To Acquire & The Urge To Merge |
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November 17, 2005 “Fortunate, indeed, is the man who takes exactly the right measure of himself and holds a just balance between what he can acquire and what he can use.”
Last week I teamed up with Revenue.net's Jay Weintraub to present an overview of the online advertising industry at the AD:TECH New York Conference. AD:TECH is the bellwether event within the interactive marketing industry, and the conference in New York set new records for attendance (8,300+) and exhibitors (200+). (See the November 7th story in DMNews, "Ad:tech Becomes 'Behemoth' in Industry," in which I am interviewed.)
The session that Jay and I gave at AD:TECH was entitled "A Crash Course on the Digital Marketing Vendor Landscape." This was the second time we have presented this session at an AD:TECH event, and we evolved the presentation considerably based on the feedback we received after first giving it in Chicago this past July. One area that Jay and I focused on during the presentation last week was to provide a perspective on much of the merger and acquisition (M&A) activity going on within the industry. This has provided me an opportunity to share many of my thoughts and observations regarding M&A practices with Apogee readers as well.
After several years of relative inactivity, the past two years have been increasingly fervent in terms of M&A related to companies in the online marketing industry and to the publishers of online content. This year alone, we've noted more than 100 acquisitions, with more than twenty of them taking place for dollar amounts ranging from $100 million up to $4 billion dollars. With deals flying around faster than you can blink, it can be hard to keep track of everything going on and put it all into perspective. We all see news stories about a variety of big deals taking place on an ongoing basis, but one seldom has a chance to see in one place a summary of the deal flow over a period of time. Reviewing such a summary allows one to get a handle on what kinds of companies are making acquisitions, what kinds of companies are being acquired, and what kinds of prices are being paid in many of the deals. In order to sort it all out, I've put together a summary of the 2005 M&A deal flow, and I've included a link to it below in this edition of the Apogee to help you see the spectrum of deals taking place.
Companies will justify entering into M&A activity for a variety of reasons. Here are some of the most common:
Okay, these are the "official reasons." Yet in an industry as new, dynamic, and evolving as the interactive marketing industry is at present, you probably won't be surprised to find out that the reality is that deals get put together in some very strange ways and are motivated by some very odd reasons. Here are some that undoubtedly also take place:
Sound M&A practice involves:
From the point of view of the acquiring business, the goal is to buy organizations offering the greatest ratio of benefits to costs with the least risk. From the point of view of a business looking to be acquired, the goal is to find the right acquirer who will see and pay the greatest value for the acquisition of their business assets. In both cases, finding the best deal partner requires exploring a spectrum of alternatives. It is only rarely the case that a company that is first considered, or that is the most convenient to make a deal with, is the one who will maximize value.
There is a tendency to think that larger organizations making larger acquisitions are going to be more intelligent about understanding the risks and rewards of the deal, but history shows that just isn't so. Simply because a company just spent $150 million on an acquisition doesn't necessarily mean they fully understand the repercussions of the deal any better than an organization making a $150 thousand acquisition. In fact, I would contend that as the size and complexity of the deal increases, the ability of the individuals responsible to fully understand the consequences tends to steadily decrease.
Also keep in mind that large company cultures can sometimes create situations where deals are made for reasons that further the short-term agendas and careers of individuals within the organization, but are not always aligned with the best long-term interests of the organization as a whole. In a smaller organization undertaking an acquisition, where an owner knows that they are personally going to have to deal with the financial and managerial consequences of the deal for a very long time, this is less likely to happen.
Studies have shown that companies that engage in a lot of smaller deals produce better results (nearly twice the excess shareholder return compared to intermittent buyers, as calculated by subtracting the company's cost of equity from total shareholder return). This seems to be due to two primary factors. Firstly, the integration of a smaller entity tends to be less complex and less risky than dealing with the integration of a larger business. Secondly, companies that engage in acquisitions on a regular basis continually refine their negotiation and integration skills and processes based on lessons learned.
Sometimes one can tend to think that the value of a business can be determined in a straightforward manner by an evaluation of its financial statements, but in an evolving industry like the interactive marketing and advertising industry, nothing could be farther from the truth. Different acquirers will see very different values in the exact same business, because they will perceive very different futures for how the acquired company will add value when combined with their own resources. Factors such as brand value, business reach and relationships, and other unique assets can add a very substantial premium to the value of a business in the eyes of the right acquirer, whereas in the eyes of other potential buyers, those very same assets may offer very little value.
One role that ADASTRO focuses on is in helping companies that want to eventually be acquired or IPO grow in a way that will enhance and then maximize the perceived value of their brand and other off-balance sheet assets. A study conducted by HP a couple of years ago found that these assets can add an average of 40% to the valuation of a company. Recent acquisitions of Neopets, MySpace, Linkshare, and Skype showed huge valuation premiums, and these kinds of exits are the holy grail for the entrepreneur. Conversely, recent exits for WebTrends, DoubleClick, and Fastclick seemed motivated under very different circumstances and did not appear to offer the sellers the same kinds of premiums.
Some organizations find themselves so inwardly focused on their operating performance and on their balance sheet that they don't have a chance to take an outward focus that emphasizes perceived value in addition to revenues. In other organizations, the management is so close to the business that they have difficulty seeing their organization in the way that it is perceived by others external to the company. An organization that fails to create a strong brand and other off balance sheet assets is leaving significant money on the table at the time of exit. While this isn't something that can be corrected overnight, one can easily point to organizations within the industry for which a directed and focused strategy aimed at increasing perceived value could easily yield substantial results (measured in magnitudes of tens to hundreds of millions of dollars for some companies) over a period of less than a year and at costs that are trivial in comparison to the value added.
With that in mind, our summary of the industry M&A deal flow, starting with January, 2005, is posted on our Online Advertising Discussion List web site at:
Enjoy!
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