Cross-Border Aggregation: Why Global Deals Are Hot

Folio: The Magazine for Magazine Management, May, 2001 by John T. Cabell, Deborah J. Schwab

As the number of stateside M&A options dwindle, media companies are looking overseas. What they're finding--the demand for pan-regional ad buys and better property values--is persuading publishers to go global.

The U.S. media and magazine publishing industries have just gone through the most extraordinary period of growth, capitalization and consolidation in history. Never before has the business seen so many launches, mergers and acquisitions, and such a diversity of investors.

American business is personified by entrepreneurism, and this was certainly evident during the recent dot.com decade. Uncharacteristically, however, the nineties were also a period of intense consolidation by magazine publishers. The past year alone saw a record $190 billion in merger and acquisition activity. Today, few independents survive, and there simply aren't many remaining targets for scale-hungry players. Where to turn?

One logical place is the international arena. American publishers have dabbled in international publishing for years, primarily through the licensing of their titles. A few have even been brave enough to launch their own businesses offshore. More recently, as the pace of international business has picked up, joint ventures have become desirable; local partners appreciate the capital investment and American players get to participate in a more substantial upside. But cross-border M&A activity has never been significant.

In contrast, overseas media groups merge and acquire as a logical cross-border entry route or consolidation play. Most foreign markets are dominated by one or a few publishers, and growth often comes from building or buying next door. Europeans in particular--concurrent with the economic realization of the European Community (EC)--have aggressively pursued stakes in neighboring territories. Indeed, most of the continent's major players (Emap, VNU, Hachette-Filipacchi, Rizzoli, Gruner Jahr, Axel Springer and Edipresse, to name a few) have made acquisitions throughout Europe and the rest of the world. Why haven't Americans followed suit by extending their M&A appetites?

"Publishing is still a cottage industry in the U.S.," says Mark Edmiston, managing director of the investment bank AdMedia Partners. "In comparison with other industries, and even with other media, the magazine business is small and parochial. Americans still see many growth opportunities stateside. They have little facility for foreign languages, and they're uncomfortable with foreign cultures." Rightly or wrongly, because of this country's scale and level of economic development, U.S. publishers view even domestic niche opportunities as offering greater returns than overseas acquisitions.

Another perceived impediment is the lack of experience with foreign publishing business models. George Green, president of Hearst International, says, "American publishers are accustomed to high cost structures, lots of promotion, subscriptions and boatloads of advertising. With few exceptions, most foreign-market publishers operate very differently: They have low staffing levels and overheads, they're newsstand-driven, and they're very creative about marketing and about limiting expenses." Acquiring a business where the rules are so different from your own is frightening for many Americans.

There are, of course, very real risks to acquiring and managing businesses in other markets. Political exposure is at the top of anyone's list: A change in a country's political system or leadership could affect your company's finances, reputation and perhaps even the safety and well-being of your employees. A currency devaluation could decimate your company's cashflow (and with it, its share price). And foreign law practices and idiosyncratic accounting standards also stand in the way of cross-border business for many U.S. concerns.

Compelling reasons to look abroad

What, then, are the opportunities, if any? And are there forces in play that could catalyze global M&A activity?

Clearly, the context for international transactions has never been better. The long-term potential of the global economy may best be realized by the media industry, where English has become the currency for business and news, and where information and content flow freely across borders--thanks largely to the Internet and cable and satellite television.

If anyone could rouse U.S. publishers to look overseas, it's the advertising community. Advertising is now dominated by global agency networks such as Interpublic, Omnicom and Havas, whose widespread offices serve a global roster of clients. They, in turn, are looking for efficient pan-regional and global media buying opportunities. Those publishers who could offer one-stop media buys for a multitude of markets have a leg up on their competition.

Another pulling effect is the potential for better deal value. During the past three years, American communications deals (excluding telecom) have been valued at average multiples in excess of, respectively, 3X, for revenue, and nearly 14X, for EBITDA. In comparison, European deals have gone for less than 2X (revenue) and 12X (EBITDA). Unlike the domestic media business where high valuations have been driven by the Internet and speculation about the economy's continued strength, the international media industry has been characterized by slower and more predictable growth.