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Publishers, Libraries, and the Food ChainA Webinar for NISO
Joseph J. Esposito and David LambSTM Advisers LLCMarch 8, 2017
Topics● What is industry consolidation and why does it happen?● Different kinds of buyers (financial and strategic)● Private equity investors and venture capitalists: two
types of financial investor● How does private equity work?● Why are so many deals happening at this time?● Who are the strategic acquirers?● An example of consolidation● The interesting precedents of ResearchGate and Meta● What to look for in the coming years
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What is Industry Consolidation?● Consolidation refers to the merger of companies in the
same industry, leaving fewer but bigger companies● A sign of a mature industry● Key driver: the benefits of scale● Large market share stabilizes pricing and locks in profits● Rarely does consolidation yield significant innovation● Example: merger of Springer and Nature● Look for more consolidation ahead
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Categories of Buyers● Strategic buyers
○ Established company operating in same market○ Interested in extending range, increasing market share○ Finance acquisitions out of earnings, but may borrow money
■ Easily financeable because of size, assets■ Interest is tax-deductible, which encourages acquisitions and borrowing
○ Acquisitions can be highly competitive
● Financial buyers○ Investment firm that takes in money from investors
■ Your institution is likely invested in both private equity and venture capital○ Don’t always have deep interest in the markets they invest in○ Look to resell properties at profit after period of time○ Tend to be highly cost-conscious; rarely encourage big investments by
management
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Private Equity vs. Venture CapitalPRIVATE EQUITY (PE)● Works with larger companies● Requires cash flow● Likes mature industries● Focus is on generating cash● In tandem with revenue
growth increases company value
● Companies in this space funded by PE○ Innovative Interfaces○ Baker & Taylor○ OverDrive○ Ex Libris (ProQuest)○ Springer Nature
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VENTURE CAPITAL (VC)● Works with start-ups● Rarely involves debt● Focus is on innovative
products and services● Investees rarely possess scale
or have strong market position● Successful start-ups sell out
to larger entities○ Mendeley○ PubGet○ Aer.io○ *Meta
How Does Private Equity Work?● Typically identifies “platform” company to serve as base
for other acquisitions○ ‘Bolt-ons’
● Seeks to create large entity in specific market● Uses some of its own capital, but borrows most of the
money for the purchase○ Hence term: “leveraged buyout”○ Ratio of capital to debt varies with interest rates
■ Aim is to use as little capital as possible■ Return generated by paying down debt as well as increase in company value
○ Strong focus on improving cash flow (as distinct from revenue)
● Strong focus on cutting costs● Always seeks to resell enlarged company later
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Why So Many Deals Now?● Mature industry invites consolidation● Perception (right or wrong) that scholarly
communications is ripe for change● Advantages of scale very apparent (e.g., Big Deal)● Deals being used to lock up markets, create barriers for
competition○ ProQuest seeks to be library infrastructure provider (acquires ILS)○ Follett seeks dominance of distribution channel (acquires Baker & Taylor)○ EBSCO seeks to be library gatekeeper (acquires YBP)
● Investment environment○ Low interest rates○ A great deal of capital looking for a place to go to work○ Highly efficient global network of investors○ Low return from other investment categories
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Who are the Strategic Acquirers?● All large commercial companies use acquisitions as part
of their strategy● Usual suspects: Elsevier, Springer, Wiley, Taylor &
Francis, SAGE, ProQuest, EBSCO, etc.● Acquisitions large and small ● Important that acquisitions are always strategically
appropriate ○ Elsevier would not acquire a trade publisher○ HighWire would not acquire a college textbook publisher
● Likely that acquisitions will proceed apace in coming years
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Example: ProQuest Acquisitions● 2011 - ebrary● 2013 - Ebook Library (EBL)● 2013 - Coutts, MyiLibrary, OASIS● 2015 - Ex Libris (from Golden Gate Capital)● 2016 - Alexander Street Press
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Meta and ResearchGate● Harbinger of a new paradigm● Meta acquired by CZI: Facebook money applied in the
public interest (such is the claim)○ First time major Silicon Valley entity has waded into scholarly communications○ The aim of making this a free service alters perceptions of investments
● ResearchGate just announced huge financing ($53 Mn)○ Among investors: Bill Gates, Wellcome Trust, Goldman Sachs○ Once again, big capital deployed in market that never attracted it before○ Implications of public interest despite commercial status
● These sources of capital dwarf the industry giants (e.g., Elsevier, Wiley)
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What to Watch For Next● Ongoing consolidation● Increasing pricing strength on part of largest companies● No detectable antitrust objections● Many, many new start-ups
○ Largely technology-based○ Providing highly specific services
● Strong possibility of ongoing interest from Silicon Valley○ New strategic objectives○ Blurring of line between public interest and commerce○ Potential to rattle the largest traditional players, who cannot operate on the
scale of a Google or Amazon
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Contact Information● Joseph J. Esposito
○ Partner, STM Advisers LLC○ [email protected]○ @josephjesposito○ http://scholarlykitchen.sspnet.org
● David Lamb○ Partner, STM Advisers LLC○ @lamb○ [email protected] ○ STMadvisers.com
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