That’s according to John Shea, COO of BerkeryNoyes, a New York investment bank which advises on and tracks deals in the information sector. Berkery targets the lower middle market, focusing on deals with a $25 million to $500 million enterprise value.
What are information companies? Berkery defines them as a “marketplace of companies focused on the provision, management, or creation of data.” Or, more easily, all internet, media, and software businesses, Shea says.
Last year, there were 275 PE-backed deals in the information sector for $25.45 billion. This compares to 222 transactions in 2009, which are valued at $16.21 billion, according to Berkery Noyes data. The sector’s biggest PE deal in 2010 came from Warburg Pincus and Silver Lake, which bought Interactive Data Corp., a unit of Pearson, for $3.25 billion.
Shea spoke to me by phone this morning.
Q: Why are PE firms attracted to information companies?
A: Historically, it’s a sector that has high margins and often has a subscription revenue model. The [information] business is more consistent in performance than companies with fixed assets types of businesses like manufacturing that are more volatile. Software and information businesses are more steady.
Q: Of the PE firms, which are the biggest buyers?
A: Hellman & Friedman, Francisco Partners, Thoma Bravo, Providence Equity and the Carlyle Group are the biggest. Thoma Bravo was the most active in 2010 with 10 acquisitions.
Q: Which strategics are the most active?
A: Thomson Reuters continues to buy. Oracle is very active in the market. And there’s Pearson.
Q: How are multiples in the sector?
A: Multiples have gone up [since 2009]. There was a small increase in EBITDA multiples [in 2010]. Companies sold for 10.5X in 2010 [versus 10.1X in 2009]. Companies performed better in 2010. This year, the 10.5X EBITDA multiple will likely increase a bit, probably another ½ turn, maybe up to 11. The economy is good and there is more liquidity coming back into the markets. We will see more debt available to PE to become more active in the marketplace.
Q: But EBITDA multiples are still below the 12.1X companies sold for 2007.
A: EBITDA hasn’t gone back to where it was in 2007. There was a bubble then. But today there are fewer buyers in the marketplace for these types of levels. These kinds of multiples sometime price private equity out of the marketplace. Strategics are able to buy businesses at lower multiples than 2007, because there’s not as much competition to buy businesses today.
Q: Strategics are being very aggressive, I’m told.
A: Strategics were very active [in 2010], pushed up multiples, and pushed out the PE buyers. From 2009 to 2010, a number of deals were being done by strategics and this increased more rapidly than the number of deals done by PE firms. Strategics have more cash available and are more focused. They’re finding it a good time to buy niche businesses that fit their strategic plans.
Q: We’ve seen a lot of deals this year. Do you think this will continue?
A: M&A will be up in 2011. It will be rising for next three years, certainly in the niches where we work. A lot of what Berkery sells are private companies and private owners tend to come back into the market later than large public companies. Privates typically wait to really see if there are clear, strong trends in M&A before they come back into the marketplace. Private companies tend to lag coming back into the M&A market.