Debating with myself (part two): is the B2B media industry still worth investing in?

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The second in a series posts about issues I am still debating in my own head. The first post, about newspaper paywalls, appeared yesterday.

No media sector has been as devastated by "investment" than the B2B media industry. Few people inside the industry like to talk about it publicly, not least because they may be dependent on those same PE firms for their next job, but media professionals certainly talk quietly among themselves about what has happened to their industry.

The conversation, though, came a little more out in the open when William Pollak, former President/CEO at ALM Media, penned an article claiming that the private equity people were not happy with B2B industry leaders because they see the industry as slow to adapt to the changing face of publishing, calling B2B editors "bastions of Old-Think", for instance.

I find it hard to argue with the logic except when one considers that they, the PEs themselves, own most of the major players in the industry and are installing its leaders. If the industry is slow to move to digital it is because the PEs have been making all the moves.

Responding to the post was Rex Hammock, owner of the content marketing firm Hammock Inc. He lays into the PEs for installing the management teams that they now complain about, and for not understanding the very industries they were investing in:
"These savvy investors installed some of biggest jack-asses you can imagine. Really. They were idiots who knew nothing about business to business media — or business, for that matter.

They fired people and merged companies and bought other companies for amounts that made some previous owners look very, very savvy. If they were lucky, they sold out to the next guy who was left holding the bag — thus, making themselves savvy."
The two positions are not in conflict: PEs are right that the B2B media industry has been slow to move to digital, and critics are right that the investor companies have devastated the industry by buying and selling properties like Monopoly cards and installing the same old faces who know next to nothing about B2B.

Looking back just one decade ago, many of the big B2Bs are either no longer around, or have divested so many properties that they are not heavy hitters any longer. In the late nineties, for instance, two of the largest B2Bs were Cahners and Primedia. Cahners eventually changed its name to Reed Business Information and two years ago divested just about all its U.S. titles (or closed them down). Primedia acquired title after title in the nineties, and sold off title after title the following decade. The company was sold off – one PE to another – to TPG Capital last year. Most of the titles an outsider might be familiar with had been sold off long ago (like New York and Modern Bride).

So does that mean that one shouldn't invest in B2B? I struggle with this issue all the time. The reason is that I spent so many years involved in B2B – first at McGraw-Hill, later at Reed Business Information as well as several smaller publishers – and because I have also been involved in the mergers and acquisitions industry, either as a buyer or seller, or as a consultant.

Macfadden is one of the few B2B media firms
in the U.S. launching tablet editions

Evaluating a media investment kind of comes easy to me. I actually like looking at P&Ls (call me sick) and understanding the value of a media property or investment comes in awfully handy if you're trying to grown a business.

But B2B isn't just about P&Ls, as many PE firms have sadly found out. So many sales have occurred in the past two decades that had insiders shaking their heads. What looked good on paper turned out to be a bad investment because the buyers had no real idea what they were buying.

You'd think this wouldn't be true of private equity firms, but my own experience is that they are shockingly clueless when in comes to accurately evaluating B2B investments.

The reason for this is that the value of a property is far more than its P&L. PEs are pretty good at discovering what the true financial picture of a property or company is. They can see when some of the expenses have been moved out of a P&L by shifting them into another line. Almost any magazine can be made to look profitable if the administration and operational costs can be brought out to zero.

But B2B properties need to be evaluated by more than revenue and expenses. The value of a title is also in its readership and the editors and sales staffs that manage the day-to-day operations. A B2B title with a solid core of qualified readers is a gold mine, and one with a circulation list left to decay has little to no value. Why buy a title with poor readership when one can launch a new title just as easily? Why buy a title where the editors and sales staffs have split their time on other titles and know next to nothing about the industry or its companies?

This decay in the quality of the titles and staffs is most often laid on the doors of the owners of these B2Bs who have cut back on audits, staffing and management.

A publisher, for instance, used to be someone who was an expert in their industry, who often was on the board of the major trade association, went to Washington to advocate for their industry, and often knew more about the industry than many of the company executives in it. Today a publisher is someone who baby sits multiple titles and staffs and who consults with the B2Bs executives about staff cuts. The last time I held the title at a B2B media company I had nine titles that bore my name. When I left may have been publisher of nine titles but I directly managed exactly one sales rep. It was, in a word, insane.

So why would someone want to invest in this? Well, because companies need information and that is what a good B2B product gives them. One company needs to sell to another, and B2B products such as magazines, websites, newsletters, data products, trade shows, seminars, webinars (etc. etc.) all facilitate this. B2B is not going away, even if many of the B2B media companies appear to be.

The problem with investment community, of course, is that there are few investments made in growing businesses. Oh, I know, Wall Streeters will debate this, but the reality is that any good PE can make money by buying a dog of a property – the key is exploiting the property in such a way that money can be extracted. You've certainly heard, I hope, of the ways a Bain can come in and make money. Even if the property is bought at too high a price and sold at too low of one, the fees extracted from the purchased property can generate enough return to justify the investment.

This is why not all those bad investments went sour – at least from the standpoint of the PE.

But there are still B2Bs out there who are making good returns serving their customers – readers and advertisers. While it is true, as William Pollak points out, that B2Bs have been slow to move to digital, anyone looking to invest would see this as an opportunity. And while Rex Hammock may be right that many B2B have been betrayed by the PEs that have bought them, it is also true that many of the properties have solid, but often hidden potential based on their strong readership and brands, and their knowledgeable and able staffs.

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