By Martin Levin
Those of us who work with book publishers who continue to seek growth opportunities by acquisition have found that the “game” has changed significantly.
Beginning in 1960s well-established US publishers realized that they could growth faster and increase their profitability by acquisitions. They could diversify, acquire established back lists, add talented staff, and when they combined the business functions they could increase profitability. Publishers outside the US, UK and Europe found that they could acquire companies in the US to reach a new, large and affluent market. This tide flowed well into the current period and through some economic downturns. This was a period of constructive deconstruction of the industry so that now 20 companies comprise 80% percent of the total US book revenues. Seventeen of these companies are foreign owned. This was the golden age of acquisitions.
What publishers wanted in this period was a consistently profitable company, well managed, that would either enrich an existing list or expand into a new area of publishing. The prices paid for the companies were codified into a ratio of times revenue or times cash flow or times pre-tax earnings or a combination of these ratios.
It is impossible to say exactly when the e-book business really started, but the experts place it at the time of the first launch of the Amazon Kindle in November 2007. In the last four years the Kindle and e-books sold half a billion dollars and a billion dollars, depending on whose numbers you trust. The Nook and other e-readers came into the market increasing the revenue. Earlier, in July 2007, the first iPhone was released, followed by the App Store in July 2008, and the iPad in March 2010. Additional smartphones, e-readers, and tablets appeared. This period from 2007 to today has been transformational.
What do publishers look for when buying a company today? First and foremost, they are looking for another seat at the table. Every one of the top 20 companies has a strong technology component and are active buyers of independent companies with creative technology programs. Hundreds of smaller publishers use Constellation, a service offered by Perseus, to make use of electronic readers, digital book search, print on demand, and other digital formats. Pearson has invested hundreds of millions of dollars in acquiring independent companies that provide educational support and assessment services.
The expectations by publishers in the period prior to 2007 are now being put aside. The major publishers are selling off companies that they acquired that are not likely to be a factor in new technology, and are shying away from buying smaller companies that might be profitable product-line extensions. The current aggressive buyer of publishing companies is looking for companies, hopefully, at the $10 million plus level (the more “plus” the better) where the technology component is well developed, with current modest (or no) earnings but a potential for future growth. The ratios being paid for these companies could be well above the levels considered in the pre-2007 period.
Currently, there has been a “push back” from many credible smaller publishers in niche areas having a long history of profit. These companies have a modest technology presence but are prudently avoiding making a big bet. In “normal” times these companies would be sought after by major publishers. But not now. These smaller publishers have taken themselves out of the market, are doing well and enjoying life in the slow lane, hoping to be discovered when the technological frenzy ceases.
We are living in interesting times. The publishing industry has passed the point of no return. There is a great appetite for the technologically created product as the 500-year-old industry reinvents itself one more time. Keep tuned for another chapter in this true life drama
From 1967 to 1983, Martin Levin was CEO of the Times Mirror Book Group, growing it to become fifth largest publishing company in US at the time. He is currently an attorney at Cowan Liebowitz & Latman, specializing in mergers and acquisitions. He teaches Publishing Law at New York Law School and is a resident Fellow of the Yale Publishing Course.