Gartner, Inc. announced today an all-cash offer of $64
million for competitor AMR Research.
Gartner (NYSE: IT; MGI-X: NR), expects the deal to close by the end of
December, and will add AMR’s approximately $40 million in revenue to Gartner’s
industry leading $1.2 billion (TTM) top line. The market reacted mildly positive to the news, edging its
market cap up 3% in midday trading.
The purchase price of $64 million is slightly more than 1.5
times revenue, and about 8-12 times EBITDA (MGI estimates). A cash deal with a
quick close indicates this was priced to move, particularly when a business
with strong recurring revenues and modest growth can attract higher
multiples. With a high percentage
of its revenues derived from vendors (70%+), one could logically question whether or
not the price tag represents AMR’s view of where tech spending and vendor
viability will be in 2010 and beyond.
After taking into account business efficiencies and cost reductions, the
purchase price is more like 4-6 times pro-forma EBITDA.
AMR’s revenues have been essentially flat since it filed for
an IPO in September, 2000 and subsequently withdrew the offering in 2002 when
the IPO window had closed. CEO and
majority owner Tony Friscia has long been rumored to be looking for an exit,
and without a robust IPO market, a cash sale to the largest player in the IT
industry makes sense, particularly in light of a potential change in capital
gains taxes. By selling to
Gartner, Friscia achieves liquidity in uncertain times, and provides a soft
landing to the loyal employees of AMR.
Gartner can take one of two approaches to integrating AMR.
If it follows the model of its acquisition of META group, Gartner will
consolidate the operations, retire the AMR brand, and blend AMR into the
Gartner operations. The risk to
this is that many AMR clients subscribe to AMR precisely because it is not
Gartner. Vendors are looking for an alternative marketing channel, and users
are looking for an industry-focused perspective that they find lacking from
Gartner. The second approach to
integration would be to leave AMR as an independent brand with its own research
operations, but consolidate the back office and provide AMR access to the
strength of the Gartner sales channel.
We believe Gartner will likely take the former approach, and quickly
integrate AMR into Gartner’s operations.
There is plenty of room for consolidation – both in the back office, and
among the analyst ranks. Although
some vendors may elect to merge their Gartner and AMR budgets, the loss of
contract value could be offset by a likely price increase and the ability of
Gartner to add the AMR product into its global subscriber base. It is hard to see this deal transforming Gartner's ability to sell beyond the IT department.
Bottom line: We expect this deal to close, and to be modestly accretive for Gartner. It will boost Gartner’s FY2010 results beyond the low
expectations it set with the announcement of this deal. AMR provides Gartner added depth in
vertical industry coverage and brings several well-known industry analysts (e.g., Bruce Richardson). Looking into FY2011, Gartner will need
a new source of top line growth, unless of course the IT industry rebounds robustly
ahead of expectations - which does not appear to be the expectation of AMR's owners/research leaders.