To M&A or not to M&A

The mediafutures survey shows that, as at the end of last year, 26% of consumer media companies were working on a live deal at that time, with another 22% expecting to acquire another company within the next two years. So, this adds up to 48% actively on the acquisition hunt – higher than the 32% in B2B, which looks slightly quieter at the moment, but not by much.

All of this activity is hotting up currently, bringing the volume of deals very much back in line with pre-pandemic levels. The reasons for this are varied. Yet the end result is clear – the current volatility of the whole media business means that there are both strong companies wanting to expand and weak companies limping along in need of help, with a wide range in between those two extremes.

M&A used to be thought of as the domain of larger companies, but is now seen by many smaller operations as a realistic route to revenue growth and to building the broader capabilities of the business. A loose partnership can morph into a merger (often messy) or a clean acquisition (more straightforward, but still filled with challenges). In addition, the whole market is a mix of well-planned strategic deals and quick-fix opportunistic bolt-ons. The result is a very jerky, stop-start M&A market, where realistic company valuations are often difficult to make.

The mediafutures survey digs deeper into all this activity and asks companies that have recently been involved in an acquisition or merger, to score the success of the deal on a scale of 1 to 10. The scores averaged out at a solid 6.4. This is very much in line with the 2020 survey, but is well down on 2019’s 8.4 score. There have clearly been some M&A disasters over the last couple of years. This was due usually to three factors: (1) poor due diligence before the deal, (2) deeply rooted cultural and organisational mismatches between the companies, and (3) cack-handed integration of operational processes and tech stacks – a recurring theme.

The success rates are marginally higher in consumer (6.4) than B2B (6.1), but the difference is not significant. In terms of company size, the largest operations have the strongest success rates and the scores plummet the smaller the company is. The obvious conclusion is that the more deals a company completes, the better they get at it.

That is why Collingwood Advisory suggest a much more planned approach to M&A. As Collingwood’s Piers Bearne puts it: “The key to both buying and selling media businesses is actually building relationships on both sides over a period of time without making rushed decisions. Digital-first, subscription-led, multiple revenue stream operations are commanding a premium at the moment. Yet there is no perfect, one-size-fits-all business model that instantly unlocks the value of a market. And the cultural fit between buyer and seller is critical, unless the deal is simply a cold asset strip.”

Here are what some of the mediafutures respondents had to say:

Opportunities

• “Market consolidation is what we are into primarily – taking out the opposition and clearing space for own brands to grow. Yet we are also after digital-first businesses where we know we need to accelerate our growth and know-how.”
• “We don’t look seriously at digital properties – they are just too expensive at the moment. We scour the market for established niche magazines which have fallen on hard times or where the management / owners do not have the expertise to take advantage of the new world we’re in now.”
• “We look for acquisitions that enter us into new markets / sectors and that add new revenue streams. We also look for acquisitions that bring new technologies and skills into the business.”

Challenges

• “Acquisition prospects that are private equity owned result in valuations that are simply unrealistic. Yet valuations generally seem overcooked at the moment, driven by emotion rather them being rational or justified. And by the massive competition for attractive digital assets.”
• “There is a real lack of availability of great targets that are in line with our strategy. And of the right scale. And also – importantly – who share the same values.”
• “It’s difficult finding the time to balance running an existing media operation with investigating / researching / due diligence on potential takeovers. And we’re simply not big enough to have people dedicated to M&A per se.”
• “Getting the required finance on decent terms is a real challenge.”

These publisher quotes show the different motivators for M&A, but also highlight a number of themes – the intense competition; the focus on digital and the necessity of getting the culture-fit right. Yet there is a sizeable group of “organic growers”, who have rejected the whole M&A route completely, usually for one of two key reasons. Firstly, they simply do not have the resources – in terms of cash, manpower or expertise – to find an appropriate acquisition in the first place and then to follow it through to a successful integration. Secondly, they have a more fundamental belief that the better growth option is organic. While they recognise that this may be a slower path to take, they feel that it is more stable, sustainable and controllable in the longer-term: they tend to be family-run or owner / operator companies. In between the two extremes of organic versus inorganic growth are a growing number of hybrid “buy-and-build” strategies.

M&A is now a central element of many companies’ path to growth. Yet there are two major qualifications. Firstly, as M&A spreads into smaller companies, the success rates are also dropping. Badly executed, an acquisition can destroy a business. Secondly, even though an operation may be hesitant about being involved in their own M&A activity, they might well find that the market they operate in has changed overnight because of a deal that someone else has made. To M&A or not to M&A – that is the question.