Digital Media M&A Heating Up But Deals Are Still Small And It's A Buyer's Market

There has been very little to talk about in the digital media M&A space the past year, but as we previously noted, there appear to be some signs of life. 

Today, we spoke with investment bankers and VC execs specializing in digital media to gauge what kind of activity to expect in the next year.  Not surprisingly, they’re bullish:

  • There will be a significant increase in M&A activity in the digital media industry the next year.
  • The majority of this activity will be driven by small deals with few blockbusters in the $500-million-plus range.

There has been some M&A activity in the tech/digital media space so far during 2009, but many of these were distressed sales, which fell into two primary categories:

  • Large company buying the assets of a small start-up at a fire-sale rate.
  • Start-ups with a lot of VC cash buying smaller competitor start-up that has run out of cash.

For example, we estimate about half of the deals in the first half of 2009 were distressed sales, versus 25% of deals in the first half of 2008. 

INCREASED ACTIVITY/DISCUSSIONS BUT FEW REAL DEALS

But conversations among industry execs have turned from raising capital and shoring up finances in the spring to a dramatic increase in M&A discussions in the early summer.  Many execs we spoke with expected a lot more M&A announcements in the next few quarters, driven primarily by strategic acquirers.  AOL and Yahoo appear to be the most active among the big tech companies looking for strategic acquisitions, primarily tuck-ins. 

The majority of deal discussions around strategic acquisitions are falling into the following categories:

  • Large companies with strong balance sheets buying smaller, weaker competitors.
  • Smaller companies joining forces with competitors.

The VCs we spoke with have heard a lot more from investment bankers recently regarding M&A deals, though some questioned how “real” the activity was.  Though interest has increased, it is still very much a buyer’s market and some VCs believe there could be a lot of “kicking the tires” on potential deals without real urgency to put money to work.  There appear to be few companies that would drive enough interest to attract more than 3-4 bidders currently, which is obviously the ideal situation from the seller’s side.

SMALLER DEALS DRIVE DISCUSSIONS

The vast majority of digital media M&A discussions appear to be about deals below $100 million.  The deals are being driven primarily by:

  • Early-stage companies that are light on cash and are more open to cashing out at an earlier than usual point in the company’s cycle
  • Larger strategics looking for deals in the current environment but hesitant to spend a lot of money on “must have” companies in the $500-million-plus range.

After a year of serious belt-tightening, a lot of startups are looking to raise cash and in many cases use the fund raising process to drive M&A interest.  Often they’ll go to a strategic partner looking for an investment while while keeping the door to an all-out acquisition wide open.  We believe this will spur increased activity in strategic acquisitions of small startups in the sub-$100-million range, and is likely a cause of the increased activity we’re hearing about.   

Though many types of companies fall into this category, online video companies are especially interested in getting taken out–specifically technology-intensive platforms that take a lot of investment before revenue-generating sales and marketing teams can be ramped up. 

STILL A BUYER’S MARKET

Unfortunately for startups, the terms of these deals are getting much more conservative from the buyer’s side.  Corporate development executives wouldn’t even take meetings during Q408 or Q109, and though they are coming to the table now and performing due diligence, they are being much more aggressive on price and tougher on terms.  A lot more are putting portions of the price in escrow and negotiating tougher earn-out provisions.  So, while in past years earn-outs would typically be around 15% to 20% of a deal price, there are now closer to 50% in many cases.   

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