Will these companies remain stand-alone? Yesterday Thomson Reuters acquired ASSET4, a Swiss environmental, social responsibility and governance data provider. As a reminder, the ‘Thomson’ family holds 7% of IHS Inc.. Facset Research? Standalone. CoStar? Standalone… REIS, standalone (and 5x FCF?)… Gartner? Forrrester? ComScore? It seems one could spend a little time searching this sector-specific, entrenched, data-driven productivity tools realm and search horizontally for investment opportunities.
These are stocks one should track closely, as information service providers with potentially stellar returns on capital, sometimes drowning in excess liquidity and trading at close to 1 to 1.5 EV/revenues. Unsurprisingly, funds we like to keep an eye on such as Valueact and Silver Lake happen to like this kind of business. They own more than 1/3 of Gartner (although we don’t know if they’re on the way out or “in”). Also interestingly, half of Forrester’s stock price is in cash. An excess cash we know it doesn’t need for much. A company called Ballentine Finn & Co., Inc. (a fee-only multi family-office) owns 35% of Forrester’s O/S. Looks odd at first glance, but should have a simple reason-why. Comscore is now the standard of e-commerce tracking and trades at a much higher multiple. Even Arbitron is worth to keeping an eye on. Value-wise, Forrester looks like the most “interesting”, but obviously at first look.
(Update on Dec. 9th 2009: Now we know that Silver Lake plans to sell 8mm shares in Forrester Research.)
This trail sniffing makes sense. If the prices and governance are right, the business model is as close to a no-brainer as you can find. In the regrettable advent of a lack of opportunities for reinvesting the cash generated (we’re talking about niches), it can be mitigated – though not without its own risks – by the fact that these companies tend to invest in bolt-on acquisitions, such as this one announced by Gartner today. The secret is to develop or acquire niche services that are indispensable to professionals/ researchers in a given subject and tie them with existing assets (bundling), add value through online services or just dilute costs via distribution prowess. In the ideal scenario, they become so entrenched in professionals’ work flow that switching cost generates pricing power and the low capital requirements beget excellent ROICs. Links to Saraiva’s legal publishing business are not coincidence.
Ron Baron’s June 2007 take on information services providers – (PDF file): Gartner starts at page 12, then page 30 again; it’s followed by descriptions of FactSet and IHS Inc.