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Rewarding Innovation. New Perspective on Major Education Acquisitions, Investments, and IPOs Moderator - Mona Westhaver President & Co-Founder Inspiration Software, Inc. The leaders in visual thinking and learning . Walk away with a better understanding of:.
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Rewarding Innovation New Perspective on Major Education Acquisitions, Investments, and IPOs Moderator - Mona Westhaver President & Co-Founder Inspiration Software, Inc. The leaders in visual thinking and learning
Walk away with a better understanding of: • How the economy is/might influence buying and selling in 2008 • How innovative technologies (interactive whiteboards and student response systems) were merged to create a better, total solution for an emerging market • The analyst’s view on the possibilities of innovation out of the recent HM Riverdeep/Harcourt transaction • Current trends in M&A activities
Panelists • Michael Bijaoui - Managing Director, MESA • Boutique investment banking firm that serves growth companies throughout media and entertainment industries • Chris Curran - Managing Director, Berkery Noyes • Provide value-added M&A advisory services to emerging and established leaders in the K-12 through post-secondary and for-profit education markets • Trace Urdan - Managing Director, Signal Hill • Trace is a research analyst for Signal Hill which provides investment banking services, institutional brokerage and equity research for small and mid-cap companies and their investors
YEAR IN REVIEW Rewarding Innovation: Perspective on Major Education Acquisitions, Investments, and IPOs MAY 20, 2008 4
A YEAR IN REVIEWBROADER TRENDS DRIVING INVESTMENT/MONETIZATION • Sustained GDP growth – U.S. and overseas • Growing tax receipts and government spending on education • Consumer spending on education • Flatwordization Economy • Accountability and graduation pressures • Parents and students exercising discretion as consumers of education • Technology acceptance (hardware, software, social networking) • Business model acceptance (subscription, advertising) Education Market • Cash-rich financial investors • Unprecedented availability of debt financing • US Dollar relative affordability Financial Markets
A YEAR IN REVIEWTRANSACTION HIGHLIGHTS • APAX - Thomson Learning (Cengage) • Riverdeep – Houghton Mifflin and Harcourt • Pearson – Harcourt Assessment • Pearson – eCollege • K12.com – IPO • Follett – CafeScribe • Blackboard – NTI • eInstruction – Interwrite Learning • Intel Capital - Tutor.com • Providence Equity – Study Island • VeronisSuhler - Cambium Learning • Haights Cross (Triumph, Sundance) – pending • Voyager Learning – pending • Bain Capital – Bright Horizons • American Education – Little Sprouts, Tampa Day School • CFM Religion – Benziger & Silver Burdett Ginn • Ad Venture Interactive – Beautyschools.com • Madrona Venture – Teachstreet • University of Phoenix – Insight Schools • DeVry – Advanced Academics • American Public Education – IPO • Nobel Learning – Enchanted Care Learning • ChinaEdu– IPO Economy Education Market Financial Markets
LOOKING FORWARDWHAT HAS CHANGED? • Sustained GDP growth – U.S. and overseas • Growing tax receipts and government spending on education • Consumer spending on education • Flatwordization Economy • Accountability and graduation pressures • Parents & students exercising discretion as consumers of education • Technology acceptance (hardware, software, social networking) • Business model acceptance (subscription and advertising) Education Market • Cash-rich financial investors • Unprecedented availability of debt financing • US Dollar relative affordability Financial Markets
FUNDAMENTAL VALUATION AND TRANSACTION DRIVERS • Market Environment • Current and forecast market growth • Buyers/investors dynamics – strategic and financial • Availability of debt financing • Strategy & Business Model • Market share upside • Competition • Length of sale cycle • Predictability of revenue • Resiliency of revenue • Intellectual property • Operations • Strength and depth of management team • Well managed • Marginal cost structure • Ability to scale • Opportunities for synergies (revenue and cost) • Financial Information • Historical and projected revenue growth • Historical and projected cash flow growth • Capital expenditure needs • Seasonality and working capital changes • No bad surprise during process • Not every driver is available • Flexibility and time as an asset
MESA OVERVIEW Founded in 2003, MESA is one of the nation’s leading independent investment banks specializing in media & entertainment Exclusively focused on assisting early stage and middle market companies achieve their growth and transactional objectives Private placement agent, buy-side and sell-side representation, and strategic consulting services Transactions range from private placements to $500+ million acquisitions and divestitures MESA’s partners have extensive expertise across the media industry, an expansive network of industry relationships, and the technical skills required to execute complex financial transactions Key areas of expertise and focus include: • Digital Media • Education • Publishing & Information • Music • Media Services • Business Media • Film • Animation 9
MESA 85 FIFTH AVENUE, SIXTH FLOOR NEW YORK, NY 10003 212 792 3950 M.E.S.A. Securities, Inc. is a registered broker dealer with FINRA 10
SIIA Ed Tech Industry SummitHoughton Mifflin Harcourt Innovation or Monopolization?May 20, 2008 Trace A. Urdan, 415-315-1661, turdan@signalhill.com
The Transactions • December 2006 – Riverdeep plc acquired Houghton Mifflin to create Houghton Mifflin Riverdeep Group PLC. Price is $3.4 billion which amounts to 3.3x sales and approximately 12-13x EBITDA. • December 2007 – HMR announces purchase of Harcourt K-12 publishing assets for $4.0 billion, including $3.7 billion in cash and $300 million in cash or 2.7x sales. HMH Today K-12 Curriculum Content Sales • HMH generates $2.5 billion in annual sales from: • K-12 basal textbook programs • Instructional technology • Standards-based assessments for students and educators • Reference works • Trade for adults and young readers
Innovation Riverdeep management understands power and efficacy of interactive, digital content. Larger scale of enterprise and concentration of revenue will allow for greater investment in R&D and better distribution of digital content. Lesser development costs and faster turnaround will drive promotion of flexible, digital content. Brand strength will allow for digital content to be presented and taken seriously in the adoption process. Monopolization Riverdeep management ex-investment bankers looking at the financial transaction. Enormous leverage will restrain capacity for innovation as organization focuses on digesting and cutting costs. Tight margins and high leverage will intensify organizational pressure to sell core product first. Disproportionate size of print units make notion of upturning the core less likely rather than more likely. Competing Theories
Relatively Small Piece of the Pie • Size of industry quite small in relation to $500 billion spent annually on K-12 education. • Industry growth also modest and cyclical.
Industry FocusDelivering return to shareholders requires improving efficiency
ELHI spending lagging overall state expenditure in near-term
Conclusion • Cyclicality and shrinking share of ELHI dollar places pressure on basal publishers that leaves them more vulnerable than they might initially appear. • Pressure on HMH is likely to cause the firm to be most focused on generating cash and creating efficiency. • Consolidation primarily financial. • Line between basal and other supplemental beginning to blur. • Innovation unlikely to come from vendor side of equation, but rising knowledge and competency in alternative delivery methods can’t hurt. • Buyer-side demand and spending pressure in other sectors of the market more likely to drive innovation in basal.
Important Disclosures • Analyst Certification • I, Trace Urdan, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Signal Hill does not compensate its equity research analysts based on specific investment banking transactions. Signal Hill Equity research analysts receive compensation based on several factors, including overall profitability and revenues of the firm, which include investment banking revenues. • Applicable current disclosures for all companies covered in this report are available in written or electronic format upon request. To request copies of applicable current disclosures please write to the Signal Hill Capital Group Research Department at the following address: Signal Hill Capital Group Research Department, 300 East Lombard Street, Suite 1700, Baltimore MD 21202. • Disclaimer • This report has been prepared using sources we deem to be reliable but we do not guarantee its accuracy and • it does not purport to be complete. This report is published solely for information purposes and is not intended to be used as the primary basis for making investment decisions, which should reflect the investment objectives and financial situation of the investor. The opinions expressed herein are subject to change without notice. This report is not an offer or the solicitation of an offer to buy or sell securities. Additional information is available upon request.