Yet Another NAB 2011 Trend – Broadcast Vendor M&A

Posted by Joe Zaller
Jul 05 2011

In the aftermath of what many vendors reported was a very successful NAB show, there appears to be an enhanced feeling of optimism in the broadcast industry, something that has been lacking for the past several years.

The global economy is seemingly healthier, the financial performance of both broadcasters and technology vendors has improved, and digital media is a hot topic across many industries as companies roll out plans to bring video and audio content to a growing number of platforms and devices.

Against this backdrop, one noticeable trend at the 2011 NAB show was increased speculation about broadcast vendor M&A and consolidation, fueled in part by investment bankers and private equity (PE) firms who were significantly more visible this year than in any NAB show in recent memory.

It is perhaps not surprising that there is an increased interest in industry M&A. Video and audio technologies have become strategic to many companies outside of the traditional broadcast business, so bankers and PE firms are looking to find companies that might add value to a larger enterprise or a portfolio of companies.

These factors have led to a flurry of recent broadcast industry M&A deals over the past year — and the pace of activity in this area appears to be accelerating. There have already been a large number of deals in 2011, including the Carlyle Group’s acquisition of The Foundry for a reported $120m, Cisco’s purchase of Inlet Technologies for $95m, Technicolor’s disposal of Grass Valley’s broadcast, transmission and head-end businesses in three separate transactions, DG Fastchannel’s acquisition of MIJO for $39.5m, and the ongoing buying spree of broadcast M&A champ Kit Digital, which has acquired more than a dozen companies, culminating in the $79.4m purchase of Ioko that was announced during the 2011 NAB show.

In addition to attracting the attention of investment bankers and PE firms, recent broadcast industry M&A activity (not to mention the healthy valuations achieved by some of the companies mentioned above), has not gone unnoticed by broadcast technology vendors. After weathering a punishing economic climate over the past two years, vendors of all sizes are now taking the time to consider their “strategic options.” Some are eager to sell their companies, while others see an opportunity to acquire other companies and consolidate their leadership position in the market.

Indeed, as shown below our most recent research of senior executives at broadcast technology vendors reveals that while about a third of companies intend to retain their private status, many others expect to be involved in some sort of strategic transaction within the next 2-3 years.

 

 

 

So what’s driving the interest in M&A activity, and what are the difference between the motivations of potential buyers and sellers?

Potential buyers are often looking for scale in the form of product lines and increased access to customers and markets. The motivations of sellers are perhaps more complex. They run the range from wanting to be part of a larger organization to the desire to cash out in a buoyant market.

Let’s examine each perspective.

 

Broadcast Industry M&A: Buyer Motivations

Expansion of a company’s product line is a key driver of M&A. Despite marketing messages to the contrary, no broadcast technology vendor truly offers a complete solution to all needs of broadcasters. Even the most comprehensive product ranges have gaps.

The question facing broadcast technology vendors is what to do about it. Broadcast technology vendors have several choices: funding internal product development, finding a complementary partner, or buying a ready-made solution through M&A. Each choice has positives and negatives associated with it.

We asked senior managers at broadcast technology vendors how they are thinking about filling in the gaps in their product portfolios. The results are shown in the chart below:

 

 

Vendors reported that internally funded product development is the most preferred approach to expanding their product ranges. Finding a complementary company to partner with is also a choice that many vendors are exploring.

Still, more than a quarter of vendors said they intend to use M&A to fill in the gaps in their product portfolios. We asked these vendors to share the motivations for wanting to acquire other companies. As shown below the top drivers for acquiring other companies comes down to a classic make or buy decision.

 

 

 

Senior executives at broadcast technology vendors listed their top two reasons for buying other companies as gaining new technical expertise and filling gaps in their product portfolio. These options apply equally to companies looking to acquire technology in their core markets, as well as those who want to buy their way into new markets.

Vendors also see M&A as a way to increase their market share. This is particularly true for vendors who have established a global sales and distribution, but have gaps in their products. This type of deal is typically a small “bolt-on” acquisition.

A less commonly cited driver is to increase economies of scale. By enlarging the scale of their operations, vendors can create savings through strategic synergies as well as through volume discounts on components and manufacturing services.

 

Broadcast Industry M&A: Seller Motivations

Senior managers of broadcast technology vendors who indicated that their company might be sold or merged over the next 2-3 years were asked for more information about why they feel this might be the case.

 

 

 

The top reasons cited by these managers for selling the company highlight both corporate and personal motivations are at play.

From a corporate point of view, managers want to access the greater resources of a larger company. This is equally valid for a small company selling to a larger company, and the merger of two small companies to create a new larger entity. These economies of scale can enable vendors to compete on a more equal footing with larger rivals.

Given that 70% of vendors who participated in our 2011 broadcast industry market study are privately held, it is not surprising that investor liquidity is also a strong motivator for selling the company to a larger entity. Whether the company is owned by the founders, a large number of shareholders, or venture capitalists, investors are always on the lookout to capitalize on their assets. And why not? Some of the vendors mentioned above were able to achieve a “strategic” valuation for their businesses, dramatically increasing the personal fortunes of company insiders.

Interestingly, just six percent of respondents cited difficulty continuing as a stand-alone entity as a reason to sell the company. This implies that if the price is not right, company owners may be happy to continue with the status-quo until a better offer comes along.

 

This article was originally published in the IABM Journal. It is based on the findings from the Devoncroft Partners’ 2011 Big Broadcast Survey (BBS), an annual study of global trends, technology purchasing behavior and the opinion of vendor brands in the broadcast industry. More than 8,000 people in 100+ countries participated in the 2011 BBS, making it the largest and most comprehensive market study ever done in the broadcast industry.

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