Media M&A: Partying Like It Was 2000

Merger & acquisition (M&A) activity in media totaled $20.5 billion in 2006, the biggest year for such deals since 2000, according to a report from media investment bank DeSilva & Phillips. The report suggests that the good times will spill over into 2007.

DeSilva & Phillips' media credentials are impressive; last year, the firm advised on 17 transactions, and its clients include Conde Nast, Vestar Capital, and former Citigroup (NYSE:C) subsidiary Court Square. From its insider perspective, DeSilva & Phillips sees a full M&A deal pipeline, advising investors to expect a myriad of going-private transactions.

The demands of Sarbanes-Oxley and institutional investors make it increasingly tough to run a public company. By going private, companies can better focus on long-term efforts -- and often net a sizeable and lucrative equity stake for their management teams in the process.

Given the liquidity in the debt markets and the large amounts of private equity funds, it seems that no media company is immune from a transaction. In 2006, VNU went private in an $11.1 billion deal, and Reader's Digest (NYSE:RDA) was swallowed in a $2.4 billion buyout.

This does not mean that valuations will soar. "Multiples should remain fairly disciplined," said Reed Phillips, managing partner at DeSilva & Phillips, when I interviewed him yesterday. "Buyers -- both strategics and financials -- are very knowledgeable about media."

Reasonable valuations should be good news for major media companies like Dow Jones (NYSE:DJ), Meredith (NYSE:MDP), Time-Warner (NYSE:TWX), and McGraw-Hill (NYSE:MHP), which can use their large cash flows and hefty market caps to buy smaller growth companies. According to DeSilva & Phillips' index of 11 media companies, overall stock performance rose 17% in 2006, compared with the S&P's 15.8% increase.

In addition, expect media companies to continue to buy up Internet properties -- but not with the kind of sizable deals we saw in 2006. "No, traditional media companies will move upstream to larger deals as they can show success with integrating the smaller ones," Phillips said.

In all, DeSilva & Phillips sees more of 2006's main trend ahead: heavy M&A activity from both strategic buyers and private equity firms. The firm also predicts increased purchases from European firms, given its improved economic conditions and the strong euro. In other words, media could see an even better year in 2007.

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Fool contributor Tom Taulli does not own shares of companies mentioned in this article. He is currently ranked 328 out of 17,523 participants in Motley Fool CAPS.