According to analysis prepared exclusively for Integrity Research by Marlin & Associates[1], the international M&A advisor, average valuations for large publicly traded research and information firms shrank 26% in the first quarter of 2020. The firms selected for this analysis are predominantly information firms which also contain research components.
Revenue multiples declined from a high just over 6x 2019 revenues to around 4.5x as of the end of March 2020. Earnings multiples fell from 22x trailing EBITDA to under 16x as of March.
Sources: S&P Capital IQ, Marlin & Associates
Valuations have eased to levels last seen in the first quarter of 2017. Q1 2020 EBITDA valuations were the same as valuations five years ago, while revenue multiples remained 9% higher than levels as of March 2015.
Sources: S&P Capital IQ, Marlin & Associates
Marlin & Associates has prepared these special valuation benchmarks for the investment research industry in collaboration with Integrity Research Associates. The benchmarks monitor the valuations for publicly traded firms that offer research-related services. The ‘trim mean’ metric used to calculate averages excludes the highest and lowest values from the calculation.
Marlin cautions that averages can be misleading and that no one multiple or combination of multiples should be used as a predictor of the future value of any company. Growth rates – which often help drive value – may include acquisitions while EBITDA profit margins may be skewed for a variety of reasons including currency fluctuations.
First quarter 2020 revenue and EBITDA multiples
Revenue multiples during the last quarter ranged from 1.5x actual 2019 revenues for Forrester Research, a global industry research and advisory firm, to 9.6x actual 2019 revenues for rating agency/information supplier S&P Global, which acquired Kensho Technologies for $550 million in 2018. The median value was 2.6x actual 2019 revenues and 3.2x estimated 2020 revenues.
S&P Global (9.6x), Moody’s (9.2x) and IHS Markit (6.7x) enjoy the highest trailing revenue multiples among the firms tracked. Removing these three firms from the public company set would result in an arithmetic average EV / revenue multiple of 2.6x 2019 actual revenues, perhaps a more representative benchmark for research firms.
Sources: S&P Capital IQ, Marlin & Associates
EBITDA valuations in the first quarter ranged from 7.8x actual 2019 results for Euromoney Institutional Investor to 21.5x actual 2019 for Morningstar. The median values were 19.2x actual 2019 EBITDA and 16.4x on a forward basis. Excluding the three highest values gives an average forward EBITDA multiple of 14.3x.
No top line growth in 2020
As a result of the pandemic, analysts project no revenue growth in 2020, down from median growth of 9% in 2019. “The decline in stock prices during the first quarter of 2020 anticipates future revenue and profit issues,” commented Ken Marlin. “Most of these firms have significant subscription businesses so revenue weakness is less apparent immediately, but the market sees that going forward.”
Cautions on multiples
Since most investment research businesses are either privately held or vertically integrated within broker-dealers, selecting publicly traded bellwethers for investment research is a challenge. All the firms selected offer research services but, in many cases, research may be a minority component of overall business.
Note also that the valuation multiple of a large publicly traded firm that is a leader in its niche may not be a valid comparable for assessing the value of smaller firms or those that are not market leaders. As a result, valuations for smaller privately held research firms may differ markedly from those implied by these multiples.
Marlin & Associates is an international investment bank and corporate advisory firm based in New York City, with offices in Washington, DC, and Toronto. The firm advises owners and managers of U.S. and international companies that provide software, data, and related services and has a particular expertise in advising owners and managers of firms that provide business intelligence, marketing intelligence, fintech and healthcare IT. For more information please visit www.MarlinLLC.com.
[1] Marlin & Associates Securities LLC, a wholly owned subsidiary of Marlin & Associates Holding LLC, is a broker-dealer registered with the Securities and Exchange Commission and is a FINRA/SIPC member firm (www.finra.org). For more see www.MarlinLLC.com. Nothing contained herein should be construed as a recommendation to purchase or sell any security. The information herein is not fully comprehensive, nor does it consider specific objectives, circumstances or needs of individual recipients.