The media industry has experienced a turbulent time over the past two years. The onset of the technology, media and telecoms stock binge, followed by a slump in the advertising market, has led to a subdued and reflective climate; an opportune time to assess the key influences for media investment in the coming six months.
Attempts to predict the advertising cycle have been given false credence by use of jargonistic descriptives. "U", "W", "V", "L", "canoe", 'bath", "double-dip" imply a level of foresight that simply isn't available. In reality, the bottom of the cycle is not in sight, let alone the slope on the other side. Even so, comparatives will naturally improve and the current consumer confidence provides support for more positive news in the second half of the year. A key issue will be the confidence of the stock market in pricing ahead of proof.
Despite the City having wilfully encouraged TMT companies to raise large sums of capital its support is no longer guaranteed. Those companies that based their business plans on shaky foundations or over-ambitious expectations are likely to close, fold or get taken over; obvious casualties as the final debris of the TMT party gets swept up.
However, there are even deeper ramifications for larger media companies. 1999 and 2000 were periods of intense corporate strategic movement: "media neutrality", "content is king" - familiar soundbites bouncing off boardroom walls. Many wildly overspent in those years and, while their media-neutral strategy was sound in concept, it is still three to 10 years out. They are now being told by a sadly-disillusioned (if largely self-inflicted) investor-base to focus on core skills. Rarely has there been such a strategic reversal in such a short period of time. This will drive M&A activity throughout 2002 as these companies seek to refocus, dispose of non-core businesses and unravel vertical integration chains.
Meanwhile, while liberalization was promised to the regulatory landscape, it is now recognised to be still some way off and, in itself, is unlikely to drive further M&A activity in the short term. Even so, the prospect of the Europeans coming over for a media feast could liven up matters, with the ITV pie being the obvious amuse bouche.
Pleasingly, we are at last seeing shareholder valuation expectations in line with buyers. A combination of the tragic events of September 11 and gloomy 2001 results has caused shareholders and owners of businesses to reassess. Media prices will not pick up quickly - let's not forget they are still at a 30% premium to the rest of the stock market. The number of small cap stocks (by which we mean below one billion) that are in the no-interest, no-capital trap will only increase. The euro will increasingly drive analysts to view the European media sector as one, reducing further the number of stocks they focus on.
What is evident is the need for a reappraisal of M&A strategy by media companies. It follows that, in this new era of realism, there will be a positive effect on M&A activity as price expectations of vendors and acquirers become more healthily aligned.