M&A Buyers and Sellers Still Don’t See Eye to Eye on Price

There is an inherent disconnect in the M&A world between buyers and sellers over what companies should be trading for, which has resulted in a prolonged period of relative inactivity. Of course, it’s not ice cold. WTWH bought Aging Media last year and then just recently acquired CFE Media.

But there have been many examples of companies coming to market, testing to see what happens, even getting pretty far down the pike, and then seeing the deal fall through. According to a couple of sources I spoke with, in the last eighteen months, Endeavor, Questex, and Randall Reilly all didn’t quite make it to the finish line. And if we look at the AMO Private Equity Database, there are many other companies that have been owned for long past their fund’s maturation.

Then, there’s Future PLC’s B2B business. Last summer, Sky News reported that Future was looking to offload its B2B business. This includes brands like SmartBrief, TVTech, AVTechnology, and more. According to Sky:

City sources said on Wednesday that Future had hired JEGI Clarity, a media-focused advisory firm, to gauge interest from potential bidders.

One added that the sale process would encompass the majority, if not all, of Future’s B2B operations, reflecting Mr Steinberg’s intention to refocus the company on its consumer-facing brands.

That deal obviously didn’t materialize. Yesterday, they rebranded the whole portfolio as Future B2B with a fancy new marketing homepage and everything. This may be all being done to make the asset look better to sell, but it’s more likely that they’ve accepted that a deal isn’t going to happen right now.

The problem is that these companies’ investors are clinging to history and can’t accept that the economy has fundamentally shifted.

“Sellers are looking at the Industry Dive deal and telling themselves that they should also be selling for that valuation,” one executive at Omeda’s OX7 event said over drinks.

In 2022, Informa bought Industry Dive for $389 million. Considering that Industry Dive was expecting to generate $110 million in revenue that year with a 30% margin, this was traded at 11.8x EBITDA. The full deal was valued at $525 million, dependent on them hitting specific revenue targets, which, based on the challenging 2023 ad year, I suspect they have not earned. Nevertheless, this was an excellent valuation.

“Industry Dive sold at the tippy top,” another executive told me.

The problem is that we are not in the 2022 market any longer. I spoke with four bankers about the state of things. As one said to me on condition of anonymity:

Many sellers are still fixated on 2021 valuation multiples, which have proven to be market highs. Today’s environment is different. Companies don’t have the same growth they had in 2021 especially digital growth as it has slowed. Marketers have decreased and or delayed budget spend. The cost of capital is a lot higher now than in 2021 too.

That same banker told me about two deals they were part of that fell through. “Happened on two of my B2B demand gen deals last year as well – one with about $12m of EBITDA and one with about $25m of EBITDA,” they said.

But it’s not only 2021 that is causing problems. A separate banker, also on condition of anonymity, said:

Demand outstripped supply (of high-quality businesses) over the last 12-18 months, and so competition increased. This has driven up valuations for those high-quality businesses, but middle-of-the-road assets simply didn’t trade. Thus seller expectations have risen as a result of seeing fewer (yet higher priced) deals plus also those PE backed who were invested in 2020/2021 have intrinsically higher expectations baked in due to entry multiples.

In other words, only the very best businesses sell for any premium. Yet, every business assumes that they are the crème de la crème. But there’s also a concrete financial reason as well. As one operator said, there’s resistance to accepting the lower price because their LPs might have been told about a higher potential price.

However, a third banker I spoke with advised caution: “I’m not seeing that [lofty expectations] for a “lot” of B2B media companies. At the same token, not many of them have come to market, so the sample set is small.”

So, what has to happen to narrow this spread between buyers and sellers? There are a few things.

First, sellers need to accept that the economy has fundamentally shifted. Interest rates are up, and so is the cost of capital. These are very rough numbers, but the cost has increased from 4.5% to 10%. Because of this, PE firms can’t take on as much leverage, which limits their ability to hit their expected IRR and cash-on-cash returns.

Second, buyers need to get more comfortable with the new state of things. It’s hard to pencil a deal when interest rates are rapidly rising; now that we have some consistency on the cost of capital, the expectation is that more might happen over the coming months.

Third, everything gets better if interest rates drop. If that happens, marketing spending might increase, the cost of capital might decrease, and valuations might move in the right direction. The consumer price index report showed that inflation had only increased by 0.3% yearly, which is a signal of some cooling taking place. If that continues, the Federal Reserve could lower rates.

But one final banker had some very pertinent advice to share. “We’ve been in an increasing interest rate environment for two years; if bankers are not giving their clients advice that valuations will be down because of that, they are not doing their jobs.”

At the end of the day, M&A markets are fluid. What worked a few years ago is simply not going to work today. It might take a few more failed processes for the spread between buyers and sellers to narrow enough for a deal to happen. In the meantime, we can watch as all of the events companies try to get their egregiously high multiples. “I’d love to buy events, but they want way too much right now,” an executive said.

Could 2024 be for events that 2021 and 2022 were for digital media? Maybe.