Prof. Ian Giddy, New York University
By Daniel Gross
Oct. 23, 2003
Since Primedia put New York magazine on the block in September, several parties have openly expressed interest in buying the sexy title. American Media, the odd alliance of smart Wall Street money and tabloid journalism that owns the National Enquirer, wants in. Paul Corvino, a former AOL executive, has hired an investment bank to explore a bid. And in a case of life imitating punditry, New York's media columnist Michael Wolff has loudly proclaimed that he and adman Donny Deutsch are in the hunt.
Several other media types may be mulling a bid: William Reilly, the founder of the company that became Primedia, who now runs Aurelian Communications; Rolling Stone godfather Jann Wenner; real-estate mogul/publisher Mortimer Zuckerman. And, naturally, magazine powerhouse Condé Nast may be interested as well.
In other words, everyone and everybody is interested. And yet nobody is interested. So far, no formal bid has been submitted on a putatively trophy property that has been officially on the block for several weeks (and unofficially on the block for many months). The no-action auction speaks volumes not just about the changing fortunes of the original city magazine, but of the dynamics of vanity publishing.
Vanity publishing—the practice of wealthy people or corporations backing money-losing or barely profitable publications for the psychic and social rewards—is alive and well. Vanity publishers tend to attach to high-brow or ideological magazines. The New Republic brought new owners aboard last year but has kept the same money-losing ways. Entrepreneur David Bradley bought the unprofitable Atlantic Monthly in 1999 and has upgraded it sharply, while incurring further losses. The New York Sun, a neo-conservative daily newspaper with neo-con sugar daddies, was launched in April 2002.
But New York magazine, with its heavy lifestyle focus, is a different kind of vanity publication. Today, it's not something you own because you have a personal agenda. It's something you own because you want to meet celebrities and date models. It wasn't always this way. Founded in 1968 by legendary editor Clay Felker, New York helped incubate the New Journalism and laid the groundwork for profitable city-based magazines like Chicago and Los Angeles. It was acquired in 1976 by Rupert Murdoch, who in turn sold it to K-III (which became Primedia) in 1991.
At 35, New York has settled into middle-age: It's a consumer-friendly weekly, a magazine much looked-at, but not passionately read. New York ought to be printing money—that's what city magazines are designed to do. But New York has too much competition for limited advertising dollars. Time Out New York, an ever-more consumer-friendly New York Times, and free weeklies like the Village Voice and New York Press—none of which competed directly with New York in its heyday—all offer similar packages of serious journalism, opinionated columnists, and comprehensive listings.
Both the New York Times and New York Post have reported that Primedia wants at least $50 million for the magazine. But New York, which has a circulation of about 430,000, has reported declining ad sales. Last year, if the Times and Post are to be believed, it earned a profit of between $1 million and $2 million on revenues of about $40 million. Those aren't the types of figures that would excite a banker or a deal maven.
New York magazine—for which I've written a few times—has room for improvement. (The editors could start by, for example, expanding their concept of New York to include places besides Manhattan, a few gentrifying neighborhoods of Brooklyn, and the Hamptons.) But it's hard to see how any buyer could wring more profits out of it without investing a lot in content, staff, design, and sales. In other words, the sale price would be the beginning of the investment, not the end.
Today, New York is a financially marginal magazine in need of investment. Which is precisely why Primedia, troubled and debt-ridden, wants to sell it and focus on its trade and hobby publications, which throw off cash.
New York's buyer will have to be someone who has a lot of cash on hand, has demonstrated a great deal of patience, and doesn't have to pay back investors anytime soon. But few of the interested parties fall into that category. This also explains why big media companies aren't bidding. If you're a public company (like magazine titan Time Warner) it's tough to justify buying a property that doesn't immediately add to earnings. Meanwhile, large privately held magazine companies such as Hearst and Condé Nast have a strong distaste for magazines that don't turn profits. And it's hard to see why any group of investors would bother shelling out for such a low-return proposition.
If I were a betting man, however, I'd guess American Media will walk away with the prize, such as it is. Why? It would be a kind of sophisticated vanity play. Owning a highly reputable and coveted property like New York could provide some needed juice to an unglamorous company whose profitable titles are frowned upon by sophisticates. American Media has feverishly been trying to build an empire with muscle magazines, tabloids like National Enquirer, and super-editrix Bonnie Fuller. Having New York in the stable might bring some needed Wall Street credibility (and glamour) and pave the way for a lucrative initial public offering and long-term stock appreciation.
Of course, that's precisely what Primedia—a low-prestige publisher—thought when it bought New York way back in 1991. But New York couldn't shine up Mini Truckin', and it wouldn't glamorize the National Enquirer either.
Assume you are advising the buyer of New York magazine. What is the
most important information you would want to look for in the due
Diligence Checklist" and "Magazine Industry Acquisitions and
Magazine Industry Acquisitions and Mergers
Executives at Miller Freeman had their doubts before they agreed on the CMP Media deal. The $920 million acquisition would double Miller Freeman's size and cement its presence in high-tech media--but the IT industry itself was cause for the second-guessing. The technology market was in the midst of a recession, and $920 million was a lot of money to pay for properties in a market that might not recover.
It wasn't until the acquisition team was deeply entrenched in the due diligence process that things started to turn around. "As part of due diligence, we went out and talked to industry leaders," says Ed Pinedo, executive vice president and COO/CFO, Miller Freeman Inc. The process revealed that companies like IBM, Microsoft and Cisco saw an upward trend for the year 2000--Y2K issues would be dead and there were some exciting new product introductions on deck. "Had we just gone on looking at the historical trend, we wouldn't have bought the business," Pinedo says.
Due diligence can often make or break a deal--making the process of combing through projections, balance sheets and contracts all the more crucial and complex in today's highly competitive and consolidated media world.
As magazine companies become increasingly integrated, acquisitions are growing more sophisticated and strategic. "There's the basic discovery aspect of due diligence," says Eric Van Ert, director of corporate development for Hanley-Wood, "and then there's the strategic aspect." Without an exhaustive examination of the numbers that shape a potential acquisition, the strategic incentives for purchasing can backfire, he says.
Plus, there's more at stake. Magazine sticker prices soared when aggressive bidding drove multiples into the 10 to 14 range at the end of 1999. The recent market fluctuation has lowered multiples somewhat--into the eight to 12 range-- but even those numbers represent an imposing price.
Careful due diligence can supply leverage for a buyer. "If you have more time for due diligence or you're better at it, you're going to have an advantage before you buy," says Joseph G. NeCastro, CFO and treasurer of Penton Media. "You can fine tune your purchase price and, in certain cases, that will give you an edge in a bidding war," he says.
Folio: compiled due diligence checklists from a number of sources and spoke to executives about the art and science of this rigorous routine.
Due diligence is most often performed in accordance with an exhaustive checklist, but the actual process frequently varies, depending on the type and size of the deal. And while the same data is often examined--revenues, audit statements, subscriber studies and so on--companies have unique ways of dealing with numbers. "We break the categories into accounting, financial, legal and business general," says Van Ert. Within these areas, he says, the information is looked at both for basic discovery and strategic planning.
Most review due diligence by discipline, with outside help--such as accountants and legal counsel--on hand where necessary. "For smaller deals we use all internal resources," says NeCastro. "But if we're dealing with a public company, we use outside help."
Getting department heads involved in the process is critical--those are the people who will be involved in the day-to-day operations once the deal goes through, NeCastro says. "In the end, we have to run the business, so I don't want anyone abdicating responsibility for their section."
As the primary revenue source for most magazine properties, advertising goes under a microscope during due diligence, says Edward H. Fitzelle, managing director of AdMedia Partners Inc. Typically, publishers will review the last few years in order to spot trends for individual publications and the market.
"We request schedules that show us every issue that they've published in the last three years," says Miller Freeman's Pinedo. To see whether the figures add up, they do a sample. "We'd go through the magazine and trace the individual ads back to their invoices," he says.
If the numbers are off, barter deals may be to blame--which isn't necessarily a bad thing, says Pinedo. "But occasionally you run into a situation where they're bartering for things that aren't particularly useful for the business," he says. A free car wash, a free meal--Pinedo says he's seen some interesting items come up.
Identifying the customer base is critical. "We look for concentrations among major advertisers. It's important for us to know whether 30 percent of revenue comes from one customer," Pinedo says. Buyers should also look for heavy client churn. "We want to see if they have good, long lasting relationships with their biggest customers," he syas.
Healthy page counts are not enough, these executives warn. "The integrity of what they charge in terms of rates is pretty important," Pinedo says. "They might be selling advertising at a loss, using a major customer as an anchor advertiser to draw in others. That's important for us to know because it speaks to the value of the product itself," he says.
Ballooning ad pages is a positive, but only if the magazine is also able to raise it's prices. "It may mean that the only way they're selling pages is by discounting them," says Fitzelle. Look at the yield per page in order to see how well the magazine is doing versus their published rate.
However, sometimes a buyer can find value in the product that the current owner has overlooked. For instance, discounted ad rates don't necessarily mean that the product is weak--it may just be undersold. "They may be getting only 50 percent off a rate card, but we might believe that by involving sales efforts we can get the higher rate," says Pinedo.
Circulation acquisition and retention costs are off the charts; therefore, the dynamics of this aspect of the business warrant a careful examination. Start with BPA and/or ABC audit statements, renewal rates, promotion efforts, single-copy sales and fulfillment contracts.
Even if the numbers look great today, it's important to have the full perspective. "We look at the BPA statement because we want to know that there's quality circulation--and we want to see that has been maintained since the last audit," says Douglas Manoni, president and CEO of Wicks Business Information.
A careless review can cause major problems down the road. "You can have a good year or two, hut if your circulation starts to drop off, over time, so will your ad rates and so will your profitability," warns NeCastro.
In addition to audit statements, look at promotions and determine what the company is investing in circulation. "One of the most common things a seller does is cut back on circulation promotions," says Alan Douglas, president and CEO of Douglas Publications.
Red flags include changes in the pattern of mailings, lower response rates and heavily discounted prices, says Ad Media's Fitzelle. He recalls the disaster that one client went through recently. "The seller held back on the money that was normally spent on mailings, and instead threw it on the bottom line to make the company look more profitable. The buyer ended up with a company that had diminished future earnings power."
While circulation and advertising are critical, they are meaningless without the product to support them. "You want to know the editorial product is well focused and delivers value to the market," says Manoni. In order to do this effectively, he says, the buyer must review the product itself, subscriber studies and the ad:edit ratio. "One of the things we might do in front of an acquisition is actually pick up the phone and speak to subscribers," he says.
If the edit isn't strong, the buyer may be looking at a sizable investment post acquisition, Van Ert says. Whether it's a redesign, upgrading or adding staff, you have to factor these additional costs into the final analysis. Remember, any changes in the editorial will also have to be reflected in circulation promotions and ad sales strategies.
Changes in editorial direction--especially if this happens frequently, are another important consideration, says NeCastro. "It would indicate that the title probably has not found a formula that works. Even if the magazine is performing well currently, the editorial shifting could mean that the customers/readers, or sometimes the advertisers, are not satisfied with the product and the success could be short-lived," he says.
Additionally, look at marketshare, readership trends, positioning and growth potential in the market. "We assess whether or not the book has the capability to assume the number-one ranking in its field," NeCastro says.
Reviewing contracts for cost-saving opportunities is key in manufacturing. "Often if you're a larger company, your contracts are far more favorable for paper, supply, printing and pre-press," says Penton's NeCastro.
Production is a cost center--as much as 25 percent of revenue dollars are allocated toward the physical production of the magazine. Therefore, scrutinizing cost structures and vendor relations is at the top of the list in this section. "You have to look at how quickly you can migrate their operations into your existing contracts," NeCastro says. "A lot of times you have cancellation provisions and penalties, so you have to decide where the right point is to make the break."
If the acquisition is significant, it may bring you to a new scale and allow you the opportunity to renegotiate a contract.
A buyer must first verify that the provided financial statements are correct.
"We have to be sure that, in the end, the valuation is adjusted both for facts and circumstances that may come to our attention as part of the process," Pinedo says.
"What you want is P&Ls for the individual properties--the magazines and the shows," says NeCastro. In addition to getting comparative year-over-year information, he says, he requests prior and current year comparisons against budgets. "That's usually the hardest thing to get, since lots of managers don't like to show you how badly they budgeted."
One way to avoid getting burned is by doing realistic cashflow projections, he says. "It's critical that you understand the first year's worth of cashflow coming out of an operation because a seller who knows he's going to sell has a tendency to defer things," NeCastro says. "They want to get as much cash out as possible and put off certain payments, maintenance or capital expenditures." In addition to charting out the cashflow from operations, look for any below the line items, such as taxes, capital spending, upfront payments and deposits. "You want to look for big, one-time items that are going to hurt your cashflow in the first year."
Everything is in the details, NeCastro says. Financial numbers are easy to manipulate; therefore, it's the underlying statistics that "tell the tale of the tape," he says. For example, a trade show might have been profitable last year, but the real story could be quite different. "If the exhibitor numbers are good and you're getting a good rate, you can make money even if nobody shows up, but you'll never run the show again because exhibitors won't come back," NeCastro says.
Beyond attaining copies of employee lists and job descriptions, it's important to think about how each position will fit into the overall structure once the integration process begins.
Find the layer of management that makes things happen, says NeCastro. "Learn as much about each group as you can." Failure to understand how critical a particular employee is to the success of a magazine or company can burn the buyer. "We try to identify those people who are key to the continuing success of the operation and lock them down with contracts or stay bonuses," he says.
A behind-the-scenes look at the people running various departments can help spot areas of opportunity. In one case, NeCastro says, a show he was reviewing wasn't doing well. But by taking a closer look he found conflicts between the corporate management and the show management. Through due diligence, he says, it was determined that the show personnel was the team they wanted to retain. And the shows have become increasingly profitable since Penton made the acquisition.
Douglas adds that it's important to review "time in position," something sellers rarely put in the presentation book. It's vital to know not only how long a person has been with the publication, but how long he or she has been in their current position," he says. Douglas has seen situations in which a media company that's selling off a particular property will transfer key personnel to a property that is not for sale, thus protecting their top talent. Titles that are on the block can become a dumping ground for mediocre employees, Douglas cautions.
A buyer must determine what the seller owns and what is leased. They must decide, for instance, how they will integrate computers and other IT, says Hanley-Wood's Van Ext.
Building property leases or ownership can also lead to headaches. "Say you buy a company housed in a big building. You determine it has too much space, but the seller has just signed a long-term lease. Are you going to take that building, or are you going to tell the seller it's his obligation? That becomes a deal point," says Van Ert. "Somebody's got to pay for it--and if you don't want that space, it's probably going to decrease the amount you are willing to pay."
A buyer must consider insurance options. When reviewing this, a buyer should look for areas where the company is either over-covered or over-exposed. "If you need to increase the coverage, it might be easier to do it by expanding your own policies," adds Van Ert.
The other item concerning insurance is employee benefit programs. The buyer must determine how to compensate employees for any significant differences in the plans when they are transferred over. "You need to protect the employees and ensure that they are insured from the get go," says Manoni.
Beware of liabilities, says Pinedo. "If it's a stock deal and the seller has liabilities, we usually require that they pay those off at the closing," he says. As part of the purchase transaction, some of the proceeds will go directly to lenders for things like bank loans. "We want to buy the assets free and clear of any liabilities," he says.
It's also important to make sure the seller's financing scheme fits in with yours, says NeCastro. "Make sure you understand the cashflows of the company and determine that you can afford it within your current structure. If you can't, then you adjust," he says.
Also be aware of agreements and contracts that are near expiration, says Pinedo. And be sure to build protection clauses into the deal. For instance, ask for indemnification agreements for any liabilities that the seller hasn't exposed.
Susan Thea Posnock is senior editor of FOLIO:.COPYRIGHT 2002 Copyright by Media Central Inc., A PRIMEDIA Company. All rights reserved.