What's Driving Today's M&A Boom?
Michael Hughes -- Tradeshow Week, 4/30/2007
This is a good time to buy or sell almost any business — tradeshow and business media properties included. The global economy is experiencing the largest merger-and-acquisition boom in history.
Last year, corporate merger and acquisition numbers broke records. According to Dealogic, global corporate deal volume surpassed $4 trillion for the first time. In the media and information sectors, according to Jordan Edmiston Group Inc., the total number of deals in 2006 was up 18 percent to 637 transactions, and total value increased 12 percent to $60 billion. In the exhibition and conference market, JEGI tracked 52 deals, up from 34 in 2005.
Similar to interest rates driving the housing boom of 2004 to 2006, cheap credit and attractive borrower terms are driving M&A. Investment bankers often say it's a good time to buy or sell, but with a slowing economy, historically low interest rates, flush private equity firms and heavy competition among lenders, 2007 may very well be one of the best times to contemplate a deal.
Financial innovationCapital markets innovation is driving the M&A wave. One of the most important phenomena in the global economy in the last 10 to 15 years has been the explosion of the use of derivatives in financial markets. The practice of securitizing debt has spurred a booming secondary market for all types of loans. Known as collateralized loan obligations and collateralized debt obligations, these securities are backed by pools of bonds, loans or other assets and sold in slices, with their price based on risk level.
Loan securitization spreads risk throughout financial markets. Lower risk results in more loans and bond offerings, and more credit drives deals.
According to a recent Economist article, "Despite the subprime (mortgage) meltdown, creditors have not seriously restricted the amount they are willing to lend to companies or much increased the interest rates they demand. ... There are plenty of signs that borrowers are the masters, not the servants, in this relationship."
When a bank makes a loan today it is to sell it off to another bank, institutional investor or hedge fund within weeks.
Advanstar and VSSThe recent sale of Advanstar Communications to Veronis Suhler Stevenson and a group including Citigroup Private Equity and New York Life Capital Partners for $1.4 billion illustrates the continued interest in shows and trade magazines. The purchase price reflects a robust multiple of 12.1 times adjusted 2006 EBITDA (earnings before interest, taxes, depreciation and amortization) and 3.5 times revenue. Advanstar was previously acquired in 2000 for approximately $900 million.
VSS has entered and exited the tradeshow industry with a number of investments, including Hanley Wood, Canon Communications and ITE Group. VSS currently owns Access Intelligence and Ascend Media. At this point, the firm probably knows more about the tradeshow industry than any private equity group in the world.
Why tradeshows are good investmentsThe predictable cash flow of tradeshow and business media properties makes them attractive. Buyers like the fact that shows and magazines require little capital investment; you don't have to buy a manufacturing plant or maintain a fleet of trucks, for example. Top tradeshows are also considered to be protected with high barriers to entry, as most don't have a head-to-head competitor, further protecting profits.
Based on a Tradeshow Week survey of show management CEOs conducted last year, their main goals in acquiring events are to increase total revenue, seize or maintain competitive advantage, diversify revenue streams and improve operating margins. Secondary goals include fostering synergy with other businesses and making the organization more viable for a sale.
This survey also asked CEOs to rate North American exhibition M&A opportunities. While only 10 percent said "very good," 80 percent said the opportunities were "good" or "moderately good."
Still, it is a small group that pursues tradeshow acquisitions. According to TSW Research, only 9 percent of show producer organizations are active in M&A or consider buying shows a potential strategy.
Fragmented marketNo investor group has built a mega-company that controls more than a single-digit-percentage share of the North American exhibition market.
This is still a highly fragmented industry, with more than half of all tradeshows owned by associations. The two top TSW 200 show producers (Nielsen Business Media and Reed Exhibitions) controlled only 11.7 percent of the total net square footage of the top shows in 2006. These two companies ran a total of 21 shows, or 10.5 percent, of the TSW 200.
Maybe one day there will be a transformational deal or series of deals that vault one firm to ownership of 15 to 20 percent of the TSW 200 and hundreds of North American shows, instead of dozens. But this may not happen for a number of years — or it may have to wait until the next boom.
While today's investors like tradeshows, they are often making bets on specific industries served by shows and management teams, rather than striving to own shows with trade magazines. Instead of building massive companies with the goal of rolling up the events industry and dominating it in terms of market share, investors and management teams are being more selective.
VSS' past strategy is an example, as it has kept its various business media and tradeshow companies separate. The outlook for MAGIC Marketplace and the apparel sector likely drove the recent Advanstar acquisition.
OutlookEvents have been healthy in terms of growth, and it is arguably less risky to buy than launch shows in many sectors.
But interest rates are rising. The effective Federal Funds Rate at the end of 2006 was at the same level as at the end of 1999 — 4.97 percent. The effective rate was increased to 6.24 percent by the end of 2000, which was the top of the last tradeshow and B-to-B media buyout wave, dot-com bubble and 1990s economic boom.
Nevertheless, the combination of historically cheap credit, a plethora of lenders, more sophisticated financial risk management and solid tradeshow industry growth and profitability should keep a healthy deal pipeline well into 2008.
| Very good | 10% |
| Good | 34% |
| Moderately good | 46% |
| Poor | 10% |
| Source: Tradeshow Week's CEO Survey 2006 | |
| Author Information |
| Michael Hughes is associate publisher of Tradeshow Week. He can be reached at mhughes@reedbusiness.com. |
