The Valuation Gap Has Frozen Media M&A. Here's How It Thaws.

This year, three separate business-to-business publishers went to market looking to sell their companies, and each received the same dismaying message: Despite having grown their revenues and increased their profitability, none of the bids met their business valuations. For the three publishers—Questex, Endeavor, and Freightwaves—the news was not a surprise. The market for mergers and acquisitions soured in 2022 when a host of unfavorable macroeconomic factors, including interest rate hikes, inflation, political uncertainty, and a challenging regulatory environment, came together to reorder the financial landscape. The conditions have made it challenging for traditional buyers, such as private equity firms and strategic investors, to transact. In the first half of 2024, M&A activity in the media and tech sector decreased 36% in volume compared to the first half of 2023, according to a July report from PwC. Still, Questex, Endeavor, and Freightwaves each had reason to believe that, despite the adverse conditions, they might prove the exception. Questex and Endeavor were profitable, and all three were growing quickly and had a diversified business with recurring sources of revenue. Instead, while each publisher received a number of offers, the bids were from value investors seeking bargains at markedly lower multiples. Questex, which brought in over $100 million in revenue last year, was seeking a multiple of between 12 to 13 times its earnings but instead was offered multiples between 9.5 and 10 times earnings. Endeavor generated around $160 million in revenue and $30 million in EBITDA in 2023, but it was similarly unable to secure a multiple in the high single digits. Freightwaves is structured differently, as the publisher split its media business from its data business when it went to market. It only shopped its data business, thinking the annual recurring revenue would net a multiple of around 20 times earnings, as had been the case in 2021 when it was valued at $286 million. Instead, despite doubling the size of its business, in early 2024, the company received offers at a multiple of 10 times earnings and withdrew from negotiations. Minding the valuation gap This difference between what sellers want to sell for and what buyers are willing to pay is called a valuation gap, and it has bottlenecked M&A activity for the last two years, according to Daniel Pitchford, CEO of Collingwood Advisory. The phenomenon is by no means limited to the media industry, but it has had a particularly pernicious effect on the space. For one, investors’ faith in publishers’ advertising businesses has plummeted in recent years, undercut by the threats of generative artificial intelligence and declining traffic referrals. This has devalued any media firm with an advertising business, with those more reliant on advertising suffering more than their diversified peers. The gap is further widened by misleading precedents. For example, most of the deals that have happened in the business-to-business media space over the past 18 months have been those that are strategically critical to the buyer from a market or asset perspective, according to Questex CEO Paul Miller. In those cases, buyers are willing to pay higher multiples, such as when Informa bought Ascential in July at 16 times its earnings. But sellers, especially those hanging onto outdated valuations, cling to these outliers as proof that they could secure a similar exit if they hold out for the right partner. Similarly, executives pointed to the business-to-business publisher Industry Dive, which was acquired by Informa in July 2022 for $530 million, as the bookend to this period of exuberant valuations. Sellers holding out for a lookalike valuation are unlikely to get one, according to Miller. “It will be a bitter pill to swallow for sellers to accept lower multiples,” Miller said. “But when you start seeing more realism around these deals, you get more actionable comparables.” The waiting game The resulting bid-ask differential has created a high-stakes game of chicken. Publishers are reluctant to sell at deflated prices, as doing so would undercut their investors’ returns. But buyers concerned with the cost of capital and lack of upstream suitors are reluctant to act on an asset unless they can get a deal. The question then becomes which party can hold out longer. Publishers backed by venture capital firms, like Freightwaves, have a longer timetable—often around 12 years. But those backed by private equity investors typically operate on a hold period of between three and five years, meaning any media firm that raised private equity funding prior to the pandemic is now nearly to the end of that cycle. Private equity firms own roughly 27,000 portfolio companies globally, and 50% of them have been held for more than four years, according to Pitchford. That means there is a queue of assets that need to come to market over the next 12 to 18 months. Some private equity firms are extending those hold periods to between six and eight years, according to Miller. But the pressure for them to return capital to their limited partners will eventually force them to sell—lower valuation or not. “At some point, private equity has to get a return,” said Craig Fuller, the CEO of Freightwaves. “If we go into this for another year or two, then you’ll see deals transact at lower valuations because they have to return capital. When these private equity firms capitulate, it will be bad for media companies.” Meanwhile, buyers face their own set of pressures. Strategic firms need to demonstrate revenue growth and will turn to inorganic growth—i.e. acquisitions—when organic gains are hard to find. Likewise, large financial buyers that have raised capital need to deploy it, meaning they lack the luxury of waiting for publishers to accept lower valuations. How the logjam breaks Although the M&A field has been set at a standoff, many of the factors needed to end the hiatus are now in motion. The Federal Reserve cut interest rates in September and again in November, lowering the cost of borrowing money and making the fiscal environment more hospitable for private equity buyers. Similarly, the conclusion of the presidential election ends a period of uncertainty about the future, which can complicate forecasting. President-elect Donald Trump is also likely to usher in deregulation and tax cuts that will make it easier for M&A to occur. For business-to-business publishers, a newly restructured public company called TechTarget could also offer a helpful comparable for investors when the deal closes this winter. The company will include a media, data, and events business, so its performance on the U.S. public markets could help facilitate investment in private media companies with similar compositions. Given the number of available assets, once M&A resumes, it will likely return quickly, according to Miller. But rather than return at a uniformly high rate, valuations will probably barbell, with strong publishers netting multiples of 12 to 13 times earnings, while weaker ones will receive offers at six to seven times earnings. “It doesn’t mean that all businesses are going to have to discount their value,” Miller said. “But there needs to be a realistic ownership view of how each business compares to the very best.”

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The 'Valuation Gap' Has Frozen Media M&A. Here's How It Thaws.

Publishers seeking pre-2022 multiples are in for a ‘bitter pill’

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