M&A in Publishing Technology Heats up; More Acquisitions to Come
By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid
Just when you thought you had a handle on what’s going on in the world of e-book technology, everything changes.
A spate of acquisitions have quietly re-shaped the e-book conversion and e-book distribution landscape and it’s just the beginning of widespread consolidation among technology vendors that serve the book industry, say industry executives, bankers and publishers.
In August 2011, printing and logistics giant R.R. Donnelley acquired digital content publisher and distributor LibreDigital for $19.9 million; this, just a day after acquiring Sequence Personal, a software firm that enables readers to curate and publish content. In November, Manilla-based outsourcing firm SPi Global acquired India-based e-publishing firm Laserwords. Just days later, Rakuten, known as the Amazon of Japan, announced its $315 million acquisition of Canadian e-bookseller Kobo.
The pace hasn’t slowed in 2012. Aptara, one of the largest e-book conversion houses, with 5,000 employees, was acquired by publicly traded outsourcing firm iEnergizer for $144 million in early February. And in early March, e-book distributor OverDrive acquired the Australian e-bookseller Booki.sh.
(It’s hard to quantify just how much of an uptick in deal activity this represents among book-technology vendors. Dealogic, a London-based firm that tracks M&A activity, does not independently track this sector. In 2010 and 2011, however, deal activity in book publishing worldwide remained fairly steady at 73 deals for $864 million and 70 deals for $922 million, respectively, with most of those deals happening outside the U.S. This, however, only represents publishing companies and not the vendors that support them.)
The acquisitions are being driven by the vendors, who want to add capabilities and scale to their existing businesses, and by their book publisher customers, who are asking for more from their technology partners.
Owning Digital Workflow
Vendors like Aptara, SPi Global, Innodata and Ingram Content are increasingly offering their publishing clients more digital content workflow services: everything from e-book conversion to asset management and distribution. When a vendor can’t offer a certain service to its clients, one way to fix that is to acquire a company that does.
“Every company is going to be looking at the workflow and assessing their capabilities and looking to see what they need to plug in,” said Dev Ganesan, CEO of Aptara.
When R.R. Donnelley acquired LibreDigital, for instance, it bought digital distribution and asset management capabilities it lacked. The acquisition allowed the company to increase services offered to existing clients.
Publishers like Thomas Nelson took notice. The seventh largest trade publisher in the world, Thomas Nelson is a potentially large client for any vendor offering a range of digital and print services. The company currently uses Ingram for many of its digital needs.
“It was a smart acquisition by Donnelley,” said Bob Edington, vice president of digital for Thomas Nelson. “It’s a big advantage for a major printer like Donnelly to now be able to offer Libre’s services to its customers.”
Buying Into New Markets
Buying access to new clients is another reason that technology vendors are making acquisitions right now. SPi Global acquired Laserwords in part to break into the educational publishing business.
With its experience in science, technical and medical publishing (known as STM in the industry) and in legal publishing, SPi Global naturally attempted to expand its business into educational publishing. The efforts were not successful.
“Given our experience in STM and legal publishing, we tried to knock on a few education-publishers’ doors and share with them that we do very similar things for other publishers,” said SPi Global CEO Maulik Parekh. “We couldn’t get a lot of traction.”
While the businesses were similar, there were significant differences, according to Parekh.
“It became quite obvious to us that the best way to enter that market would be to acquire a company that is highly regarded as a top vendor in the community,” said Parekh. “People looking from the outside in may think that this industry has a low barrier to entry, but the biggest barrier to entry here is the relationships.”
Language and Borders
Geography – and the opportunities and risk management associated with it – has also been a big internal driver for vendors to consolidate. Opening offices in a new geographic region can give vendors access to new language expertise and new labor pools. In some cases, it can mean opening for business in a new market.
For Aptara, one of the benefits of being acquired by iEnergizer is the company’s office in Mauritius, the tiny island-state 540 miles East of Madagascar. French is one of the main languages spoken on the island. While the iEnergizer office in Mauritius primarily houses customer service workers, Aptara plans on using it as a launch pad for its French-speaking e-book conversion business.
“It’s very hard to go into a country and start an operation,” said Ganesan, the Aptara CEO. “It’s much easier to make an acquisition and start from there.”
Large companies in general also tend to diversify geographically to hedge for economic and political risk, in addition to breaking in to new markets for customers, labor or suppliers.
Digitally Maturing Publishers
Many publishers are maturing as digital content companies and are just now applying holistic thinking to their digital workflow. That can mean consolidating the number of vendors they use.
“Companies are strategically looking at their workflow and saying, ‘huh, does this make sense?’” said Brad Inman, serial entrepreneur and founder of digital book publishing platform Vook. “They piled on vendors and any smart manager is going to look at that and say, ‘wait a second, that’s not smart.’”
Sources at major technology vendors like Aptara, SPi Global and others we spoke with reported that their clients were asking them to take on more services in the hopes of having fewer vendor relationships to maintain.
“That’s becoming true,” said Andrea Fleck-Nesbit, director of digital publishing at New York-based Workman Publishing. “But Workman is still in a place where we’re working with multiple vendors.”
Many publishing companies we contacted declined to speak about the matter for fear of alienating current technology partners or for no given reason. Others spoke with us off the record and confirmed that they had already consolidated the number of vendors they used or were considering doing so. And some, who themselves are not consolidating like Workman, consented to speak with us about the trend, confirming it among their peers.
“It used to be that one vendor would be specific for this type of content, but because it’s all the same kind of content being pushed out to the various vendors it makes sense to push content to one place instead of multiple vendors,” said Fleck-Nesbit.
Bullish Bankers and Buyers
Perhaps the most important factor in the wave of acquisitions to come is that those with their fingers on the trigger predict more shooting.
According to Ganesan, Aptara is planning on making more acquisitions this year. The firm is now owned by publicly traded iEnergizer, which has a much more favorable capital structure than Aptara did as a standalone entity. That means greater access to capital for expansion.
“In the next six months we’re going to be busy with our own post-merger transition, but acquisition is definitely going to be part of our strategy,” said Ganesan.
SPi Global will also be looking for more pieces to add to its business.
“We are always in acquisition mode,” said SPi Global CEO Parekh. “We get visits from multiple investment banking firms for potential opportunities to acquire.”
The bankers themselves are bullish on the sector.
Mike Rintoul, global head of business services group at Jefferies and the banker who advised Aptara on its deal, sees more companies like iEnergizer, a traditional business process outsourcing firm that was not previously in the digital books business, taking an interest in the digital publishing market.
“iEnergizer was interested in important, attractive niches within BPO [business process outsourcing],” he said. “The attractive areas within BPO would be those where a secular trend is driving growth. All content moving to a digital construct is a fundamental driver.”
Puneet Shivam, head of Avendus Capital Inc., the North America operation of Mumbai-based investment bank Avendus Capital Private Ltd, expects several more acquisitions in the next 24 months. Beyond the factors already described, Shivam said that the time is right for the early investors in companies like LibreDigital to cash out.
“First-round investors have spent a lot of time and energy and want to see some liquidity,” he said.
Inman of Vook is, in a way, a first-round investor in his firm and sees the seas of M&A beginning to roil around him.
“Media companies laid low because of the financial collapse. While they were on the sidelines, technology companies were still getting funded. Tech was speeding along, the device market was speeding along and M&A activity wasn’t happening,” he said. “Now that things look better – the ad market is back, book publishers are seeing e-book sales go up – people are investing. They want to be in that industry because they think it’s a growth industry.”
Vook, he added, is not up for sale any time soon nor is it a potential acquirer.
Buying Technology and Talent
As is true across the technology industry, both technology and the talented engineers who build it are two of the most coveted assets for a company.
Vook could be an attractive target for larger firms that lack the technology expertise and staff that Vook has – a strength of the company, according to Inman. Aptara is among the companies that could look at Vook one day.
“Aptara is interested in both technology and geographical diversification,” said the CEO, Ganesan. “If you find a good technology and a good product that fits within our capabilities, we’ll be looking at it.”
Technology and talent has a lot to do with OverDrive’s acquisition of Booki.sh, according to OverDrive CEO Steve Potash.
“We are investing in technology and the passion of the three principals named in the press release [Joseph Pearson, Virginia Murdoch and Peter Haasz],” said Potash, who added that the company will be expanding its operations in Australia by hiring there. OverDrive will also be “looking” for acquisitions, he said.
In the end, for these vendors which promise to take the burden of worrying about complex technologies away from their publisher clients, the greatest need, the most-pressing factor in the drive to acquire might be technology: the threat of being subsumed by a company with better technology; of losing clients who want different or more technology; or lacking the technology talent to build the tools that will bring in business two or three years from now.
“The M&A in this space will be driven by technology needs,” said Ken Collins, a partner at New York based media investment bank DeSilva + Phillips and former president of Macmillan Publishing, Europe. “If you sit around and think you can fix it yourself, you’re kidding yourself.”
Write to Jeremy Greenfield
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