Mergers-a-Go-Go: E-commerce spurs merger and acquisition activity
Direct marketing is HOT – at least judging by merger and acquisition activity in the 18-month period that ended in June.
Out of 900 respondents to a survey by the Winterberry Group LLC, 55% said they were approached by prospective acquirers in the first half of 1999, compared with 66% in all of 1998. The 130 deals consummated in the first six months of this year alone were valued at $5.1 billion.
The DM landscape is changing in other ways, according to Winterberry. Almost 60% of the respondents said their companies entered new areas of operation between 1998 and 1999. And another 9% shifted their emphasis within existing areas of operation to meet market demands.
This, in turn, is driving merger mania as companies try to buy the capabilities they lack. Forty-four percent said their firms would grow “organically,” while another 30% will strive for strategic partnerships. The remainder will pursue acquisition strategies.
E-Targets
What do they hope to buy? Topping the list of desired attributes is an e-commerce capability. However, only 5% plan to purchase a database operation. A mere 3% want to buy a fulfillment unit, and similar percentages have eyes for either Web or traditional direct response agencies.
Significant percentages won’t try to acquire those capabilities – they’ll simply expand what they have, or reach out to develop strategic partnerships.
And which are the hot candidates in terms of media?
Of the companies targeted for acquisition, the most popular are firms focused on the Internet and e-commerce. Direct mail is second and telemarketing a distant third. Direct response television and magazines and newspapers trail the pack with single-digit percentages.
There’s little question e-commerce and mergers will remain hot topics in the new year.
Seventy-three percent of all companies have or are actively pursuing Internet or e-commerce initiatives, while an additional 19% said they would do so in the near future. And almost 100% believe there will be an increase in merger and acquisition activity in the online arena. Web agencies and database firms are also viewed in general as hot acquisition candidates. But that glow does not extend to lettershops – only 24% predict they will benefit from the M&A upsurge.
Almost three-quarters of the respondents indicated that total M&A activity in 1999 would outstrip that of last year. This is supported by anecdotal evidence. Three of the top 10 largest direct marketing service industry transactions in the 18 months starting in January 1998 occurred during the last two months of that period. These include the billion-dollar acquisition of Abacus Direct by DoubleClick, InfoUSA’s purchase of Donnelley Marketing, and Telespectrum Worldwide’s takeover of International Data & Response.
Sight Lines
What do acquirers want to see on the bottom line? Nearly half said that the most critical factor was EBITDA – earnings before interest, taxes, depreciation and amortization. Another 18% cited multiples of revenue.
(An earlier Winterberry Group study revealed that public direct marketing companies were valued at 1.6 times revenue and 20.9 times EBITDA.)
More than one-third said they would look at both. However, some respondents noted that revenue and earnings are limited in the case of new e-commerce companies.
Another key factor when buying a company is the firm’s management team.
Value Drivers In general, 42% see the management team as a strength when determining value and 16% as a weakness.
Also ranked high as value drivers are future sales and profitability (30%), sales history (29%) and the presence of proprietary products or services (27%). Twenty-six percent also say it helps if the company purchased is in a growth niche.
The relatively high ranking of management as a weakness may come as a rude surprise for company executives.
Eighty-seven percent of the respondents said that if acquired they would definitely stay with their firms, compared with 7% who said they would leave. Only 6% indicated that it would depend on the needs of the acquirer.
The Winterberry study, “Direct Marketing Services Industry Mergers & Acquisitions Outlook,” was based on a survey of 900 senior executives.
Who’s Who
Nearly one-third of the respondents came from the marketing department of their firm, 28% were chief executive officers and 18% were chief financial officers. The remainder said they worked in strategy, development or “other” categories.
Roughly half said that Internet/e-commerce or database marketing made up either a primary or secondary part of their business. A lower percentage – 40% – identified either mailing lists or consulting as a primary or secondary business, followed by direct response agency work (35%); fulfillment and computer services (32% each); teleservices and promotion (31% each); and printing (30%).
Twenty-nine percent said that lettershop work was either a primary or secondary business, followed by market research and Web agency operations (19% each); software providers (15%) and media (4%).
The Winterberry study was co-sponsored by Brentwood Associates; Columbia Consulting Group; DIRECT; the Electronic Retailing Association; Loeb & Loeb LLP; and Petsky Prunier LLC.
