Getty In Talks To Acquire Jupitermedia

The New York Post reported today that Getty Images, Inc. is in advanced talks to acquire Jupitermedia Corporation.

The Post said that Getty officials have been meeting with Jupitermedia CEO Alan Meckler and conducting due diligence away from Jupiter's Darien, Connecticut-based headquarters in order to avoid alarming employees, many of whom are former Getty workers. Meckler declined to comment, and a spokeswoman for Getty did not return calls for comment. Investment banks Evercore Partners Inc. (EVR) and Goldman Sachs (GS) are said to be working on the deal.

It's unclear how much Getty is willing to pay for Jupitermedia, but sources close to the deal said the image company could fetch more than $11 a share, or nearly $450 million including debt. Jupitermedia that has been generating about $135 million annually

Rumors

Rumors have been flying in connection with this move and it is difficult to know which, if any, have much foundation.

It is rumored that Alan Meckler is sick and thus may be at a point where he wants to cash out. On the other hand, his history has been to build companies and sell them, and it has been clear for some time that he has been ready to sell for the right price.

According to photographers and sources within the company Jupiter has some serious problems in integrating all the accounting systems of the many small companies it has acquired over the past couple of years. There is some question as to whether all royalties are being paid in a timely manner, not because of any intent, but because records are simply getting temporarily lost in the changeover of systems. On the other hand Getty had accounting integration problems that dogged them for more than two years after they acquired VCG and TIB in 2000. This was a matter of integrating two much larger systems rather than a host of smaller ones. Some have argued that Getty wouldn't want to go through this pain again for relatively little real gain, but others say that Getty may have learned enough from the past experience that they are not worried about it this time.

Some see this move by Getty as solely and effort to remove industry competition. Others sources say Getty is looking to expand its suite of offerings to Web site designers and online marketers.

How Will This Help Getty?

Probably the biggest problem for Getty in 2007 is how to expand revenue. They can't raise prices. In fact, prices are going to experience downward pressure from micropayment and probably also from subscription if Getty takes it over. (With Jupiter managing this line of business subscription sales appear to be flat.)

Jupiter has tried to take customers away from Getty by offering better discounts. Removing this downward pressure will help Getty's situation.

Owning Jupiter would certainly increase Getty's revenue because it puts the company strongly into the subscription market where it has had little penetration up to now. Jupiter's 2006 subscription revenue will probably be a little over $25 million (we still haven't seen Q4). Getty can also move a significant portion of the subscription content to micropayment as I suggested in Story 913, but making the micropayment and subscription offerings stronger doesn't necessarily help Getty's overall revenue situation long term. Getty needs to find more, higher paying customers, rather than lower paying that are likely to cannibalize some of the higher paying sales.

Jupiter has developed a customer base that has been looking for one of three things - a different image, a choice in suppliers, or a better price. If Getty takes over Jupiter it seems likely to remove the choice of suppliers and the better price option. If what brought these customers to Jupiter was that Jupiter was the only place they could find the right image then chances are Getty won't lose many of the existing Jupiter sales. But, if these customers are looking for a choice in suppliers or a better price they will likely go to Corbis, or some other distributor as their option to Getty. Only time will tell how much of a factor this will be.

Getty's expansion of customers at the high end has been very marginal in the last year or so despite some significant acquisitions. There is nothing of significance left to buy that might grow Getty's user base other than Jupiter or Corbis. And, acquiring any of the smaller companies in the industry is unlikely to bring Getty new customers. The existing customers will simply have more choice and purchase different, but not more, images.

Jupiter also earns somewhere in excess of $30 million from online media and trade show operations which is a line of business that is outside Getty's experience or expertise. I would expect Getty to sell off these lines of business, or it is possible that they won't be included in the initial purchase and Meckler will continue to operate them.

Stock Up

The stock in both companies is up in the first day after the announcement. Getty was up 6.9% to $55.90 a share and Jupiter was up 25.2% to $10.04 per share. Jupiter's shares were up to a high of $18.49 last year and at $5.82 on November 10, 2006.

I can understand Jupiter being up because investors get a chance to cash out of a situation that shows little sign of growth and may be on the decline. I can't quite see why Getty investors are bullish. In the last couple of years Getty has demonstrated that acquisitions don't necessarily do much to raise revenue.

Getty paid $401 million for companies that were generating about $122 million annually at the time of the acquisition. Since the first acquisition Getty has had a total growth in revenue of about $65.8 million, of $43.9 million annually, if we assume a base revenue of $185.3 million a quarter which is what Getty was earning in Q2 2005. Granted that a lot of the revenue that Digital Vision and Stockbyte was generating was already on the Getty books before the acquisition, but the growth in revenue seems paltry considering the amount Getty spent and the amount these companies were earning separately before acquisition.

Getty could also end up making the low end of the market stronger. It seems likely that a stronger low end will cannibalize, to a greater degree than is currently the case, the high end of the market.