Valuations & Acquisitions: Know What to Ask

If you work in any segment of the catalog and/or online marketing business, you’ll continuously be affected by mergers, acquisitions, growth financing, consolidations and valuations. And that’s regardless of whether you’re an equity owner or even like the subject!

The reason is simple: Deals are changing the metrics, success hurtles and economies of scale in direct marketing. With the possible exceptions of increased postage rates and merchandise importing, it’s hard to think of other variables that have changed our competitive landscape so drastically in recent decades.

In deal making over the past few years, acquisitions by equity house investors alone greatly have changed the competitive catalog environment. There no longer is a level playing field for those without “big money” backing. In addition, many analysts would argue this situation has been amplified further through acquisitions made by large direct marketers and retailers — all again, in favor of the big and well financed.

Questions & Answers

Future installments of this column will focus on answers to frequently asked, deal and financing questions. Some of these questions will originate from the audiences at mergers and acquisitions conference sessions. Other questions can come directly from you; write to me at dmgrowth@yahoo.com. Please write “Catalog Success Question” in the subject line.

To date, I’ve received a wide variety of questions, from the fundamental to the intricate. Some want to know how to calculate earnings before interest, taxes, depreciation and amortization (EBITDA); others wonder if they prospect below their contribution to fixed expense breakeven, thereby significantly increasing sales growth (but depress EBITDA); and whether their multiple valuation deal with potential investors will improve in two to three years. In other words, “What will investors pay the most for: sales growth or profits? And, how does the answer vary when comparing sales per book breakeven to the known/proven prospect universe?”

Learn by Example

You can sense how much more competitive the catalog/Internet marketplace has become and how important it is to try to learn what you can by looking at recent catalog deals. Consider these:

General merchandise/gifts: American Capital acquired Potpourri Group; Carlyle Group acquired Oriental Trading Co.; and Blyth Inc. acquired Walter Drake and Miles Kimball Co.

Apparel: Charming Shoppes acquired Crosstown Traders; Golden Gate Capital acquired Spiegel, Newport News, Draper’s & Damon’s, Appleseed’s, The Tog Shop and Norm Thompson Outfitters.

Home and décor: The Home Depot acquired Home Decorators Collection; IAC/InterActiveCorp acquired Cornerstone Brands.

Specialty foods: Wasserstein & Co. acquired Bear Creek Corp. (Harry and David, Jackson & Perkins catalogs).

There are many more examples, and not all of these deals have been sufficiently successful to increase the competitive threshold. But even the relatively
few failures affected most all of the other marketers in the product categories involved.

What to Focus On

In future columns, we’ll explore deals across product categories and within individual companies for multiples, trends, competitive changes and
operating performance you need be on top of, as you plan, grow and position the business you’re in.

Historically, most strong direct marketing businesses were largely built from one or more aspects of superior merchandising, and this continues today. For both small and large catalogers, this metric is of course what EBITDA is all about, and the basis for multiple valuation. Of all the variables to focus on, this is the most important.

Whether you’re large or small, if you don’t pay the accounting fees to produce an audited annual statement, you’re making a big mistake. The lack of audited statements (as opposed to reviews or compilations) can limit your attractiveness in the deal marketplace for both acquisition and growth financing transactions.

As your operating expenses increase, especially those related to transportation and oil (such as freight-out, importing and catalog production), in what ways should you consider being a buyer or seller to gain the benefits of savings from larger economies of scale?

Capture ‘Synergies’

If you’re considering acquiring another company, can (and how) do you best capture “synergies” — especially those in customer list and cost per order processed (variable and fixed expense)?

Can your model of the first 12-month customer value (lifetime value) be used not only for setting your annual mail plan and profit and loss, but also throughout deal making? Will financing sources actually focus and understand it? How do you present it?

Whether you’re a cataloger or other multichannel marketer, buyer or seller, financing source, managing director at an investment bank, or an educator, e-mail me a question or two. I’ll try to answer all questions with broad appeal in future editions of this column.

Larry West is president of West Cos. Inc., a New York-based valuations and acquisitions consulting firm. Contact: dmgrowth@yahoo.com.