Investment banker Tolman Geffs provides insight into why M&A activity is heating up.

We are in the warmest media M&A climate in five years. As the chart below indicates, the first half of 2005 saw 266 media transactions worth $26.7 billion. This is up nearly three times from $9.5 billion in the first half of 2004, and almost as much as the $30.0 billion of all 2004 deals. In fact, the first half of this year saw more deal volume than the total in 2001, 2002 or 2003, as tracked by the The Jordan Edmiston Group (JEGI), a media M&A firm. And July is not slackening the pace.

Not since the exuberance of 2000 have we seen comparable market activity. And it hit like a New York summer, with about 15 minutes of spring between the media winter of 2001-early 2004 and the current heat wave.

And it’s not just the internet, although the web is playing a fundamental role. Four or five macro conditions have combined to drive the current pace of media deals.

• Healthy ad market -- Often a leading indicator, overall ad spend is growing nicely. Universal McCann projects 5.7 percent growth in total ad expenditures for 2005, following 7.4 percent in 2004.
  
• Corporate growth expectations -- It is not easy to deliver more than single digit organic growth in mature businesses, and Wall Street expects more. So corporate checkbooks are open for acquisitions.
  
• Private equity plus low interest rates -- PE operators have raised gobs of money, and leverage remains stubbornly cheap. PE funds now often outnumber, outmaneuver and outbid corporate buyers on attractive companies, as well as prying loose less visible assets.
  
• The internet -- The web really is changing everything. The major diversified media and marketing groups face a growing gap in profits as money shifts online. So the majors are counterattacking, buying and growing leadership in new online businesses, such as Gannett’s acquisition of PointRoll (which JEGI handled) and Scripps’ purchase of Shopzilla.
  
• The internet part II -- The web is changing too, audiences are established and many publishers are broadly sold out. With more ad demand at the door, interactive operators are looking to buy other peoples’ audiences (like NY Times Digital/About), and tools to better monetize the audiences they already have (like Tech Target/Bitpipe, again a JEGI deal).

So not surprisingly, interactive transactions -- both media and interactive services -- represented a healthy share of transactions in the first half, 70 deals worth $7.8 billion, or 29 percent of total deal value, up from $2.8 billion in the first half of 2004.

Behind the big growth number, the balance of power among buyers is shifting. Up until last year most acquisitions of interactive companies were driven by the larger interactive players. As the second chart shows, 63 percent of total deal value in the first half 2004 represented purchases by the likes of Yahoo!, AskJeeves, CNET, Monster and DoubleClick. So far in 2005 their share has declined to 43 percent -- still up in absolute dollars given the larger market, but no longer the bulk of activity. 

Stepping up have been diversified media, major marketing services groups and private equity, who accounted for a combined 49 percent of deal value so far in 2005, vs. 29 percent in the first half of last year. Traditional media companies are seeing audiences and ad dollars shift online, and the online extensions of print or TV properties generally cannot support the same cost base and margins. So Gannett, New York Times Co., Dow Jones, Scripps and others have made substantial online acquisitions, most recently with News Corp. paying $580 million for Intermix.

Ditto for major marketing services players like Experian, WPP Group and Sabre, who purchased LowerMyBills, Dynamic Logic and lastminute.com, respectively. In addition, private equity groups are finding the cash flow required to support buyouts, led by the $670 million (net value) purchase of DoubleClick by Hellman & Friedman. 

These traditional players are likely to further increase their dominance of interactive transaction volume. Strong growth opportunities online and the need to mitigate the internet’s pressure on traditional businesses will drive many major media and marketing services players to shift 10 to 20 percent or more of their market capitalization into interactive media and services. The JEGI deal pipeline reflects these fundamental trends, and we expect to see a continued strong media M&A market -- both online and offline -- through the balance of the year. Barring an economic or social jolt, this should continue into 2006.  

Tolman Geffs is managing director at The Jordan, Edmiston Group, a media and information focused investment bank, and the former CEO of Internet Broadcasting Systems, the largest online TV  network. You should assume that Tolman and his firm have or will seek to do business with companies mentioned above.