In December, 2002 D&B announced the acquisition of Hoover's, a well-known provider of company information. Perhaps the most significant thing about the deal was not the deal itself: almost everyone seemed to think it would happen someday, but the price, whose earnings multiples bring back fond memories of bygone years.
That's not to imply that everyone thinks this is a great price. Indeed, a major Hoover's shareholder has already filed a lawsuit, the essence of which is that Hoover's is worth substantially more than D&B has offered. In addition, another stockholder, Disciplined Growth Investors, plans to vote its 5.3% stake against the sale as well. Further the one company providing research coverage of Hoover's, Wunderlich Research Partners, has stated that the $7 per share offer from D&B is "well below the value the company should command in a purchase by a strategic investor."
A shareholder's meeting is scheduled for February 14th at which time we shall see whether D&B will become a frustrated suitor or Hoover's will agree to become D&B's valentine.
The perception of Baran Rosen, president of the New York City-based mergers and acquisitions advisory firm of Whitestone Communications, is that the deal is arguably even richer than it appears:
"First, let's look carefully at the deal. D&B will pay $117 million, but Hoover's has $36 million in cash and no long-term bank debt, so the net cost to D&B is $81 million. Next you need to look at revenue and operating income (profit before interest and taxes) for the 12 months ended Sept. 30, 2002. These numbers are revenue of $32 million and operating income of $307,000.
"Hoover is promoting its having $1 million in net income for the last 12 months but most of this is due to interest income on the $36 million in cash, so the price paid as a multiple of revenue is 2.6 and as a multiple of operating income 270. The company has had minimal revenue growth year over year and has been flat for the last four quarters. Further, profit improvements have come not from more revenue but reduction in costs of goods sold and G&A expenses as a percent of revenue."
"So based on these financials, I see Hoover's as receiving an astoundingly great offer. This valuation is a throw-back to the hot Internet stock days. Looking at Hoover's based on its results and potential, the market was already valuing the business at $90 million, or less the cash, about $54 million, a multiple of 1.7 times revenue. For a company with the sizzle of Hoover's I can see the 1.7 times revenue valuation, but this is already at the high end of what most buyers are willing to pay in this post-Internet boom market."
"The question is whether the Hoover's business model can lead to significant profits by itself—D&B should only be paying Hoover's for what Hoover's offers, not for the added value D&B brings to the table. And in this valuation, D&B is paying for both."
"I do see this as a good fit, as parties pulling D&B credit reports may want the additional background provided by Hoover's and vice versa. Also, with 81% of revenue from subscriptions, Hoover's has good cash flow characteristics."
"I don't see this as evidence that strategic buyers are re-emerging. I think strategic buyers have been back since early last year. Wolters Kluwer has made a number of acquisitions, McGraw-Hill has. Thomson has. If anything, D&B is following these other players. I think the deal is a positive sign for the economy. Few companies have the insider information that D&B does on the state of corporate America and their credit positions. D&B must see these positions as shaping up favorably or they would likely not be doing the deal."
This article is reprinted with permission from The Perkins Group Special Report. Copyright January 17, 2002.
