DM world sees upset in M&A activity

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With several direct marketing-related mergers and acquisitions hitting the skids in the past week, direct marketing industry analysts and commentators are beginning to wonder if the fevered pitch of these deals over the past few years is grinding to a halt.

The most recent example of this occurred last week, when Silver Lake Partners and ValueAct Capital pulled out of the previously planned $2.25 billion purchase of data management firm Acxiom Corp. through their mutually controlled Axio Holdings LLC. This came as Acxiom chairman Charles Morgan said he is stepping down.

The private equity firms have agreed to pay Acxiom $65 million to terminate the deal, which is below the previously set termination fee of $66.75 million. Acxiom did not provide an executive for comment as of press time, instead referring to the press release.

In the first half of 2007, the value of mergers and acquisitions in the marketing sector increased by 129 percent compared to the same period last year, topping $33 billion, according to investment bank Petsky Prunier LLC.

That's was before the extent of the recent housing slump and its attendant credit fiasco was known. Coupled with the poor earnings that many companies are showing this year, oil prices remaining at unprecedented levels and recent instability in the stock market, there is a general sense that the economy may be displaying some fundamental weaknesses - and this is trickling down to the DM sector.

"There's a great deal of caution among financial institutions right now," said Don Libey, president of DM consultancy Libey Inc. "[As a result, a lot of] deals are being reexamined and a new set of threshold numbers are being applied."

Besides the changes in the market, Acxiom's less than stellar recent performance may have been a factor in that deal falling through. In July, after the acquisition was announced, Acxiom reported a net loss of $11.5 million in the first quarter compared to net earnings of $17.8 million during the same period in the previous year. First quarter revenue totaled $338.2 million, up 0.4 percent over the previous year.

"There is a lot of consolidation going on in the information and data industry," which may be having on affect on Acxiom Corp., Libey said. He pointed to the announcement last week that Millard/Mokrynski Group, which was formed when Mokrynskidirect merged with Millard Group, has become Millard Group Inc.

However, while private equity investment has been behind a significant number of the deals in recent years, there are still a lot of strategic deals going on. The kind of deal where one company buys another in order to enter new markets and build its customer base are continuing apace right now, according to Brad Schwartzberg, co-chairman and partner at law firm Davis & Gilbert, which represents a number of marketing services companies.

What commonly happens on the strategic side is that buyers will take another look at numbers that were negotiated three months previously and have second thoughts if things have changed, Schwartzberg said.

This seems to be the case with a couple of recent deals. In late September, The Finish Line Inc. accused Genesco Inc. of breaching the merger agreement between the two multichannel merchants, asserting Genesco had failed to supply certain financial information.

In June, Indianapolis-based The Finish Line agreed to acquire Genesco, Nashville, for $54.50 per share or approximately $1.5 billion. However, UBS AG, which had agreed to finance most of The Finish Line's offer, reportedly stopped working on the closing documents for the agreement as a result of concerns about Genesco's financial performance.

For the second quarter ended August 4, Genesco reported a loss before discontinued operations of $2.9 million compared to earnings before discontinued operations of $5.9 million for the same period in the previous year. Second quarter sales increased 8 percent for a total of $328 million while same-store sales declined 7 percent.

Genesco filed a suit in Chancery Court in Nashville seeking a court order requiring the shoe and apparel retailer to consummate its deal to acquire Genesco. The company also sent a letter to The Finish Line stating that it believes UBS is looking for a way out of the commitment "not because of Genesco's results, but because the upheaval in the credit markets makes this deal less profitable for them."

Also recently, communications firm Vertis pulled out of its deal to acquire American Color Graphics, and eBay said it would take a $900 million impairment write-down against the value of Skype, which means the online auction giant has reassessed the value of the Internet telephony company and is taking a loss on its original investment of $2.6 billion.

Deal makers are approaching consumer companies very cautiously right now for several reasons, said Libey. "In the past 18 months, we have shifted to a negative savings position by the consumer, which means there is more credit card debt than ever," he said. "Plus, personal equity in homeownership has eroded." n

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