SuperMedia and DexOne to Combine in ‘Merger of Equals’

Earlier this morning SuperMedia and DexOne announced that they would merge to form a combined directory and local marketing services company. This had been anticipated by a number of industry insiders for at least a couple of years.

Both companies were spun out of telcos, Verizon in the case of SuperMedia and Qwest in the case of DexOne. Both companies entered bankruptcy and restructured. Both companies had a substantial amount of debt. Both companies are seeking to transform their businesses from print-revenue centric to digital.

The merger is a straight stock swap; there’s no cash involved apparently. The transaction must be approved by shareholders from both companies but is expected to close in Q4 of this year. According to the press release:

Dex One Corporation and SuperMedia Inc. oday announced that their Boards of Directors have approved a definitive agreement under which Dex One and SuperMedia will combine in a stock-for-stock merger of equals, creating a national provider of social, local and mobile marketing solutions through direct relationships with local businesses.

Upon closing of the transaction, Dex One shareholders are expected to own approximately 60 percent and SuperMedia shareholders are expected to own approximately 40 percent of the combined company.

Veteran yellow pages executive and SuperMedia CEO Peter McDonald will be the chief executive of the combined entity, DexOne CEO Alfred Mockett will be chairman. The new entity will have 3,100 salespeople and 700,000 advertiser relationships.

If the unified company existed today it would have reported $3.1 in revenue in 2011 and $1.4 billion in revenue for the first half of 2012. The logic of the merger is obvious: create more scale, save on operational expenses.

Both companies have been trying to shift from reliance on traditional print revenue to digital. One SuperMedia executive said to me in email this morning that this will help accelerate that transition.

That’s true but the merger will also be a major distraction for employees for a period of time. Some people will lose their jobs and there will be other uncertainty as the companies combine operations. If that process can be efficiently accomplished disruption can be minimized. But employee execution may be impaired for a period of time during the transition.

The combination leaves a smaller yellow pages landscape with three major US publishers in its wake: YP, Yellowbook/hibu and the merged Dex-SuperMedia. There are a number of independent publishers as well. It will be interesting to see whether there is any movement toward greater consolidation in that sector. Yellowbook was largely created through the acquisition of independent yellow pages publishers.

The traditional print directory business has been contracting by 15% to 20% annually, while the digital side of the business has been growing.

What is your take on this? Do you think the combined company will be in a stronger position to succeed?

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13 Responses to “SuperMedia and DexOne to Combine in ‘Merger of Equals’”

  1. Chris Silver Smith says at

    The only surprising aspect to me is that it didn’t happen a year or two earlier.

    It will result in a stronger company, i believe, although i think you’re right that merger activities are a significant distraction when longer term strategy will ddepend upon some innovative adaptations in the local online market place.

  2. Neal says at

    the company will also have $3.5b in debt. that is a pretty heavy load. there’s probably more cost reduction available then they outlined in the briefing. the key question is ultimately, how quickly can the sales organization transform from high margin print YP sellers to lower margin digital solutions advisors. 

  3. Greg Sterling says at

    Agree with both points above. I think the reorg will be a significant distraction that could affect performance. If they’re lucky they’ll make the cuts quickly and get people to refocus. 

    $3.5 billion in debt is manageable over a period of several years if they can get digital revenues up. 

  4. Andrew Shotland says at

    What Chris & Neal said.  Upon seeing the news, I had a bit of a deck-chairs-on-the-Titanic feeling.  What is the strategy for growth?    

  5. Neal says at

    this is the crux of the challenge in my opinion -  how quickly can the sales organization transform from high margin print YP sellers to lower margin digital solutions advisors. imagine if they had the kind of business model that demandforce is delivering. with 700,000 customers at a valuation of $30,000 per customer = $21B valuation. 

  6. Greg Sterling says at

    To deliver a demandforce type product suite it will take technology development/investment/acquisition. I agree that’s the direction to go — operational support in addition to marketing distribution. 

  7. Perry says at

    Agree with the above, but the risk of “falling further behind” during transition can’t be understated; I saw it happen in the original Dex/RHD transaction.  

    I sincerely hope there is a newfound and obsessive sense of urgency because change management will make or break this new company.  

    Completing the merger and relaunching the newco can’t be viewed as “success” – it’s got to be defined as the launch pad for a revitalized commitment to a new business model.  

     

  8. Greg Sterling says at

    Perry: yes . . . the challenges of integration and getting the remaining employees to focus on the new task at hand will be a major challenge. 

  9. justin* says at

    Having been a soldier in this war, I would advise healthy skepticism in the face of future innovation. it may be a different battleground, but the forces and factors have changed but little, and arguably, the handicaps have just been exacerbated. i do wish Peter well, but i do wonder if this is less about transformation and more about squeezing the final bit of juice from core. i feel for the new front line in this battle. you can’t will, buy, or force change on this infrastructure and culture. i doubt those that are holding today’s paper have the appetite for risk and interactive transformation as there is no precedent for success while competition continues to form and marketplace forces continue to require constant innovation.instead, imo this is more about mitigating risk and that likely means focusing on what are the predictable portions of the legacy model so those that are taking the risk to hold today’s bag have a plausible opportunity for return. 

  10. Jeff says at

    There are a lot of assumptions here that the expected outcome is some sort of new digital transformation.  Maybe so, but perhaps it is not. Perhaps this is about optimization of the current business and continuation on the current model. It may seem depressing to some, but my experience is taught me that if you value a large portion of the deal on the cost synergies, then you will only realize them if you really focus there.  Curious to see how this unfolds in the coming weeks.

  11. Greg Sterling says at

    Perhaps you can squeeze more from the core but at a rate of decline of 20% YoY how much longer does it last — five years? Perhaps. I suppose your assessment of the deal depends on your level of cynicism. 

    Justin makes important points, however, about the challenges of transforming the culture as well as the holders of the entity’s debt. 

  12. Mike Stewart says at

    This was the plan all along. It allows them to further ride the stock to zero. I don’t think try have a plan other than automating the purchasing process, reducing directory overlap, and fighting the digital front with more focus and continued investor non disclosure of revenue mix. Dex was willing to share the breakdown, Peter kept the numbers secret like Scott Klein.

    Unless I hear of a huge change in management, I wouldn’t see this as a reason to invest in this organization. The value behind YP has always been the consultants and the monopoly…. They have essentially lost both!

    I am not a Peter McDonald fan. SuperMedia has only dropped further behind ReachLocal and with the discontinuing of Dallas and other big books, we can see the “nails in the coffin.”

    The bankruptcy frauds in this industry demonstrate the “MF Global” corruption and crony capitalist way of doing business, not “America’s Largest Small Business Advertising Agency.”

  13. Doug Mehus says at

    It’s funny, years ago I would’ve had antitrust or anti-competition concerns to this deal but now, given how fast the local yellow pages and telephone directory business has shrank in on itself and as a Yellow Media Inc. shareholder who pinched his nose and voted ‘yes’ to the proposed recapitalization transaction, I have to say this is the last of my concerns.

    I think it could be good for awhile, but all it does, really, is postpone or delay the inevitable. And, actually, it may be more harmful. Management will be more focused on driving efficiencies of the two businesses, cutting costs and merging the two corporate cultures, which is all good, and not on the transition to digital strategy. I’m no expert on how DexOne and Supermedia’s digital strategy is going – you’re probably better at determining that – but is it going more quickly than Yellow Media’s?

    Yellow Media tried this with Canpages and, if anything, all it did was add to their debt load and distract management. Upon reflection, I’d rather see them let the other go bankrupt then pick up the domain name assets through the trustee handling the orderly liquidation of the company on the cheap. ;)

    Cheers,
    Doug

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