Some of the pioneers of modern business -- such as Ray Dolby of Dolby Laboratories (NYSE:DLB) -- have been recently seeking exit strategies. These are old-school entrepreneurs who used no outside financing to grow great franchises. Yet they understand that to move the business to the next generation, they need to think about transition strategies.
The latest is J.D. Power III, age 73. He did not opt for the IPO exit. With $150 million in sales and muted growth prospects as a stand-alone entity, selling out made more sense. So, yesterday, McGraw-Hill (NYSE:MHP) announced it is purchasing marketing information firm J.D. Power (the price was not disclosed).
Every year, J.D. Power surveys millions of consumers and business customers to gauge consumer satisfaction. The firm covers a variety of industries, such as automotive, commercial vehicles, telecommunications, travel, real estate, and finance. The company is most known for its ratings of automakers, and about two-thirds of the company's revenues derive from this sector.
McGraw-Hill is a global information services provider. In fact, it has built its operations through aggressive acquisitions. Its brands include Standard & Poor's and BusinessWeek.
And, no doubt, J.D. Power will be a great brand to add to the portfolio. After all, McGraw-Hill is known for independent ratings, and the J.D. Power brand will allow it to expand into new verticals. For example, McGraw-Hill has publications for construction, energy, aviation, and health care, and J.D. Power's offering could be used to deliver expanded, or new, services to customers in those channels. McGraw-Hill also has extensive marketing dollars and global reach to help leverage the J.D. Power brand.
Much of the revenue base for McGraw-Hill is advertising. While there has been an uptick in this market, McGraw-Hill would like to focus on the more stable subscription-based revenues (this is the primary revenue model for J.D. Power).
In fact, last week McGraw-Hill purchased Vista Research, an independent research firm that caters to money managers and hedge funds. Its revenue model is also subscription-based.
But the deal-making means a short-term negative. As announced today, McGraw-Hill's acquisitions will dilute 2005 annual earnings per share by $0.06 to $0.07. On the news, the stock fell $3.79 to $92.06. But, as its history testifies, McGraw-Hill is not about making a quick buck. It no doubt wants to be around and strong for many years to come.
Fool contributor Tom Taulli does not own shares mentioned in this article.
