Thursday, October 23, 2008

Perfect Storm

Anyone trying to sell or buy a PR business right now is likely in for a tough time. The credit crunch, sagging share prices and a looming recession are all combining to make it harder than ever to get a deal done.

Let me take each of these factors in turn and explain my rationale:

1. Credit crunch - this is perhaps the most obvious problem in getting deals done. Asking banks for any loan right now is a challenge. Of course they will lend money but the real interest rates being asked have increased and the general terms of acquisition finance are a lot worse than they were six months ago. Add to this the fact that most public companies are trying to de-leverage their balance sheets and you have a situation where using debt to buy agencies has become less than desirable.

2. Sagging share prices - Public companies can usually raise money by issuing new shares to investors. Right now placing any new stock is difficult (if not impossible) and that stock will be placed at a very low price. This means they will have to issue many more shares than they would a few months ago to raise a similar amount of money. In short raising money for deals is both difficult and not terribly desirable right now. On the seller side, advisors will struggle to encourage their clients to take stock instead of cash for fear that current share prices will fall even further. Ironically they would likely be well advised to take this paper as stock prices are unlikely to remain at their current unrealistic lows forever.

3. A looming recession - conventional wisdom says that the best time to sell a firm and indeed buy a firm is when the economy is relatively predictable and moving up rather than down. This is because there is a greater chance a company will make its forecasts. In most cases if a company doesn’t make its forecasts then the people involved get a lower earnout which is clearly not good for them. However, the acquiring company is also buying a less valuable asset than it thought and that asset will deliver lower earnings. If the earnings of the acquired company are less impressive than that of the buyer then you end up with the buyer taking an earnings hit which in turns drive down their share price. In short nobody wins.

Of course some deals will get done and some of them will turn out to be good deals as not every PR agency does badly in a recession. Equally, there are firms like ours that have relatively strong balance sheets that can always accommodate the right deal. That said what is very likely is that much like the housing market right now, the majority of deals that will be done will be where people have to sell. We saw this in the last downturn and in that instance some excellent business that had some solvable but serious structural problems such as high cost office leases, or cash flow problems try and hold out for prices they would only see in the good times or simply wait too long before trying to find a buyer. Those businesses disappeared and the owners lost all the value they’d created. Others took what they could get. While these people may always wish they’d managed to deal with the downturn better they did at least get something.

These are interesting times for the agency world and its unlikely the current environment is going to change any time soon. So if your business is getting into difficulties you really should work to find a buyer now before its too late. A new buyer may well be able to solve the problems dragging the business down. Equally, if you or your management team is staring at the looming recession and thinking “I’m not sure if we have the energy to go through this again,” then you should also try and find an exit sooner rather than later. But if you have the energy and no real need to sell then don’t. Better times will come and you are likely to get a better deal. That said that requires patience and a great deal of confidence that you can keep the team you have now together through whatever is in store thanks to this wonderful new economy.

13 comments:

Anonymous said...

holy smokes...dave chapman of ketchum is one tiny short worthless idiot from the midwest...u of wisconsin...the best of the midwest (outside of northwestern) which is like saying "king of the midgets". to quote churchill, "never have so many been controlled by those who have so LITTLE to offer"

Tim Dyson, CEO of Next Fifteen said...

not quite sure i understand your point here

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