Due Diligence: The Buyer's Perspective; Appraising a Potential Acquisition Involves More Than the Scrutiny of Balance Sheets. Here's a Due Diligence Checklist That Goes beyond the Obvious. (Management)
Posnock, Susan, Folio: the Magazine for Magazine Management
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. …