Gartner, Inc. (NYSE:IT) announced yesterday an all-cash offer of $64 million for competitor AMR Research. Gartner 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.