Quantifying Year-End M&A Activity
At the annual DMA Catalog Council holiday reception held in New York on Dec. 5, two different catalogers asked a similar series of questions.
*Is catalog dealmaking winding down, or is a lot still going on?
*Are the two key buyers driving the market still equity houses and retailers?
*Will there be a lot of deal announcements in January?
They began their questioning by noting that it’s nearly mid-December and while general 2006 M&A activity reported in the national press is at an all-time high, cataloging deals seem relatively minimal.
My answers are fairly similar to this time last year, and they’re somewhat intertwined. Yes, a lot of this year’s acquisitions were driven by equity house and catalog buyers. But in the catalog and e-commerce markets, most participants are far too busy in December (and, to a degree, throughout the entire fourth quarter) to seriously focus on dealmaking. As a generalization, this seems historically true, whether they are buyers or sellers. This year remains true to form.
Catalog company owners typically are too busy trying to fill holiday demand and back orders to be spending the serious time required to be a buyer or seller — or to be raising growth or investment capital. In addition, they need to see at least a close estimate of year-end EBITDA as a metric of whether to proceed or not. (EBITDA — earnings before taxes, depreciation and amortization — is a measure of a company’s cash flow that allows investors to see how much money a company is making before deducting these factors.)
These factors seem like common sense, but there are exceptions. First, there are the deals that have been brewing since around mid-year, and for which 12/31/06 is the target for closing. They will get announced in the first few days of 2007. I personally don’t think we’ll see many (of any meaningful dollar size) this year in the catalog business.
The second exception involves those deals that are completed privately between buyer and seller without an “auction process.” These are “opportunistic” deals that require the buyer to react — and as quickly as possible — usually as soon as they show up; busy season or not.
I am involved in three right now. They normally entail all the same painstaking pre-Letter of Intent (LOI) investigation as companies sold in a broad-based auction process — only on a much shorter time fuse.
For example, just recently, one buyer conducted an in-house session with all its key marketing and merchandising staff to brainstorm and try to quantify the synergies, cross-promotion and fulfillment advantages of an acquisition. The objective was the quantification of the incremental EBITDA of the acquisition; but if completed ASAP.
This would probably mean during or near first quarter 2007, as most acquisitions require a 90 to 110-day window for completion after a signed LOI. Some are shorter, but normally only if they don’t also require raising at least part of the transaction financing from the outside. In this case, quick early investigation and completion of an LOI (during the busy season) is the immediate objective. It’s not a simple task.
So, even when you don’t see many catalog acquisitions announced in the press, there always are many deals being discussed or attempted in the background. And that’s true even if we are in the peak of the busy holiday season. And you thought you were the busiest person anywhere? No way.
If you have any questions about what I’ve discussed this week, please fill out the form and I’ll be happy to answer them.