What's an Analyst Firm Really Worth?

The following submission was made anonymously by a Spend Matters reader.

I read the recent Harte-Hanks 10-Q earlier this week and saw some interesting tidbits on their acquisition of Aberdeen Group a few months back. Here's the relevant citation:

"Note H – Acquisitions

In September 2006, we acquired AberdeenGroup, Inc., a provider of technology market research, intelligence, and demand generation services located in Boston, Massachusetts. AberdeenGroup offers market information and services through research channels, and prepares reports based on primary research and benchmarking data from more than 25,000 companies. We see the acquisition providing synergy opportunities with our Ci Technology Database, which now tracks technology infrastructure, business profiles and technology purchase plans at 680,000 locations in North America, South America and Europe -- expanding their base globally for research. The results of AberdeenGroup's reports on current marketplace experiences and trends are used to generate qualified leads by its clients, and we believe this intelligence will assist our clients in their own marketing efforts. Goodwill of $33.3 million and intangible assets subject to amortization of $8.1 million have been preliminarily recognized in this transaction and assigned to the Direct Marketing segment. We are in the process of obtaining third-party valuations of certain intangible asset and the final allocation of the purchase price is subject to refinement.

In July 2006, we acquired Global Address, a provider of global postal address data quality software and services incorporating standards for more than 230 nations and territories worldwide. Global Address, located in Bristol, UK, and with additional operations in Mountain View, CA, focuses on international address data, and has provided key components of Harte-Hanks Global Data Management, a data services offering of the company. We plan to integrate elements of Global Address into our existing international offerings, among them Global Data Management and our Trillium Software data quality solutions, while continuing to support stand-alone Global Address products and services in the marketplace. The total amount of goodwill recognized in this transaction was $8.4 million and was assigned to the Direct Marketing segment. No intangible assets were recognized in this transaction.

The total cost of these acquisitions was approximately $50.8 million and was paid in cash. The operating results of these acquisitions have been included in the accompanying unaudited Condensed Consolidated Financial Statements from the date of the acquisitions."

Let's take a minute and decode the above. If both acquisitions cost $50.8 million and Global Address was $8.4 million of this, then Aberdeen sold for $42.4 million. Goodwill made up $33.3 million, intangible assets were $8.1 million and another million of so is up for grabs for things like cash, receivables and other assets. The most interesting part of the deal though may be in the phrase "We are in the process of obtaining third-party valuations of certain intangible asset and the final allocation of the purchase price is subject to refinement". I believe that this might suggest that the value of the deal could change if a third party believes Aberdeen's prior research, customer list or other IP is worth something other than $8.1 million. Old research may not be as worthless as a week-old newspaper but the best -- and most valuable -- research is the work that is current, provocative and relevant to readers. Here are a few questions Spend Matters readers might want to ask:

- Why only $8.1 million for the IP? That doesn't sound like much for an analyst firm with a lengthy history.

- Why hasn't the deal closed already?

- How would you value an analyst firm?

The last question intrigues me as there are dozens of ways to value a firm. Some use a discounted cash flow method which looks at the power of a company's operations to throw off cash. Some use a cumulative value of EBITDA over a 5-10 year horizon. Some methods look at underlying assets (e.g., cash on hand, over-funded pensions, underlying real estate, etc.) to see if hidden value exists. Others look at the value of the people in an acquired firm. Not many years ago, dot-coms were being priced based on the number of coders or engineers in their employ.

In the Aberdeen deal, the fact that so little value was ascribed to anything other than goodwill and intangible assets could be a little distressing to investors. If these calculations are correct, there really wasn't much that Harte-Hanks got outside of the name, past research and a subscriber & customer base.

(BTW -- I thought the phrase "AberdeenGroup's reports on current marketplace experiences and trends are used to generate qualified leads by its clients" was refreshingly honest. It asserts publicly that Aberdeen is not an analyst firm but a lead generation company. As such it represents technology sellers not buyers. Does Aberdeen belong in the same ranks as Gartner, et.al.? Probably not. But then again, most analyst firms have independence issues and conflict of interest problems, anyway.)

Spend Matters would like to thank the loyal reader who submitted his / her perspective on the Aberdeen deal.

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