May 10, 2009 – Andrew Nikou is the founder and managing partner of OpenGate Capital, a private equity firm that has done deals in media, technology and telecom, including TVGuide magazine and the Models1 European talent agency. Here’s his list of what draws him to a media deal, and what makes him stay very far away.
1. Complex Carve-outs, when a parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering, are almost like a neon light pointing to a potentially good deal to be had. Where other firms might look at the deal, sigh, and see a potential mess, OpenGate looks at the deal, sees a challenge, and because of the challenge sees an opportunity to acquire a valuable and well priced asset.
2. Long-term contracts present a solid revenue platform going into the deal, give an accurate projection for future revenues, and also monetize the long-term revenue itself – something that most people in this business consider just a little important (to be subtle).
3. Scalable businesses ensure growth potential. Many firms are happy to go to bat in order to just get on base. We are looking for the home run; something that can only be achieved if a business is scalable.
4. Sticky revenue goes hand-in-hand with scalability. It’s almost like a time-space thing: scalability means that the business can grow larger while sticky revenue models ensure that a business has a dedicated customer base as a basis for growth. There’s a temptation to lump these two growth features together but, as mentioned, when dealing with high-risk, high value acquisitions, looking carefully and distinctly at each of the details is what makes or breaks a deal.
5. Mature undervalued/Neglected divisions in global companies present an opportunity to tap the true potential of the business to be realized. What a parent corporation once wrote off may have the potential to become a successful business on its own with the right resources and strategy in place.
Of course, on the flipside, there are the five indicators that tell us to go the other way, and let a following knife fall to the ground.
1. Overpriced assets. Some people might smile at this, as if it’s so obvious it’s stupid to mention, but high price often spurs rationalizations, like “The price is so high therefore the business must be really valuable.” This thinking is as common as it is fatuous. If the business is overpriced, it is overpriced, and that means stay away.
2. Under-capitalized businesses are a very clear indicator of financial danger. Quite simply, in business you want to be the guy selling air, not buying it.
3. Unmotivated sellers provide a subtle but very strong indication that something is wrong. One of the key tactics in OpenGate’s buying strategy is building and keeping good relationships with the sellers. This pays off enormously in a number of ways, many of them unexpected. But if the people in charge are complacent, the deal is going to be complacent too.
4. No prospect for value creation. Need I say more? If there is no possibility for a business’ future value, there is no future business – and no deal.
5. Overly competitive sales process. This might surprise some people, since a very competitive sales process is often associated with an opportunity to get a bargain. We’re not interested in feeding frenzies. In fact, their approach is completely opposite – keep a cool head, do your homework on the business, and create a deal from a position of strength, not one of harried weakness.