Editorials
Editorial: Pure speculation on the sale of Getty Images
Since the news broke earlier this week about Getty hiring Goldman Sachs to explore “strategic alternatives to enhance shareholder value,” many colleagues and friends in the industry have asked what it all means. In response, I offer the following with the caveat that while the comments all make perfect sense (to me, at least,) much of what follows is pure speculation:
Getty’s press-release about the matter refers to strategic alternatives (plural,) but only one such alternative seems to be in the offing; that a private equity firm will purchase the company. The New York Times reports a selling price of $1.5BB. So what does a private equity firm do, exactly, when it buys a company? To over simplify, the private equity firm buys the company with a down-payment of its own funds and borrows the remainder of the purchase price (aka a leveraged buy-out.) The purchasing firm changes the company in some way that presumably makes it more valuable, and then sells it off at a higher price than that for which the firm purchased it. A hypothetical deal, then, might go something like this: The private equity firm buys Getty for $1.5BB with $300MM of its own funds and $1.2BB of funds borrowed from the capital markets. The purchaser then finds a way to increase the value of the company (which is now private) and sells it one year later it for $1.65BB. The proceeds of the sale cover the borrowed funds and interest of, let's say, 7% for a total of $1.284BB in principal and interest. The remaining $366MM goes to the private equity firm who have just made a 22% return on their investment of $300MM. [Please note: Apart from the $1.5BB quoted by the New York Times, the numbers used here are for demonstration purposes only.]
This all raises several questions: Why have the managers of Getty come to the conclusion that they can not enhance the value of the company on their own and must sell it off to the private market to be re-worked? What does this all mean for the stock photo industry, in general? What do the private equity firms think they can do with Getty to enhance its value?
The first two questions hold the most importance for me and my colleagues. Here we have the most powerful company in our industry with a battered stock (now trading at around $25, less than half of its price of one year ago and about 25% of it’s peak of just over two years ago) seemingly deciding to throw in the towel. If the management of Getty Images, arguably the most recognized stock photo brand world-wide, decide they have no hope or restoring the company to its former glory, that can’t be good news for the rest of us. It seems the company has come to the conclusion it can’t weather the perfect storm of a weakening global economy, a vast over-supply of its main product - stock imagery, new distribution channels hawking that product opening up left and right, the rise of low-cost alternatives (micro-stock,) the decline of print publishing and advertising and the concurrent migration of image use to the lower-fee digital environment. Ultimately, to me at least, this all points to thinner margins for everyone in the business, from photographers to supplier/aggregators, to distribution channels. I suspect most people in any of those categories have already felt this effect.
Some may see it differently. While engaging in this pure speculation, I should allow for a silver-lining case to be made. If the private equity firm alters Getty’s preeminent position in the market, might that create opportunities for other players? Should the deal result in the absence of Getty as a competitive force, I can see how this could help the rest of us. But then, won’t we all face the same difficulties Getty has encountered, each in the context of our own smaller-scale operations? 
Try as I might to imagine a logical scenario in which this turn of events becomes a great benefit to the industry at large, the silver lining alludes me. This change might well exemplify the consequences of “creative destruction” in our industry. In an industry undergoing creative destruction, however, inevitably some create while others have the destruction done to them. I hope that any reader who can make a good case for an optimistic view of the Getty announcement vis-à-vis the entire industry will contact me about it. I’ll gladly post their thoughts in this space.
The question of what a private equity firm might do with Getty also intrigues us. My sources in the investment banking world tell me that $1.5BB is too small a deal to make it worth the trouble to break the company up and sell it in parts. (Silly me: I wouldn’t have believed $1.5BB could be too small for anything.) How, then, might they make the company more efficient and profitable to give it a higher value? To over simplify, again, here’s what I’d do: I’d keep the editorial RM business, but pare it down, ditch the creative stills RM business and the sales teams and automate the whole creative side with RR, RF, micro-stock. (All those RM photographers and Getty sales personnel who now want to send me hate-mail will find my contact information in the About Us section of the site.) Others have suggested that the Celebrity/Entertainment segment might be split off. That is the one area that has shown steady and promising growth of late and the demand for that content is sky-rocketing in the US. Yet another friend has made the point that Getty would make a nice add-on business for companies like Google, Yahoo and AOL, or for news organizations such as AP, AFP, BBC, Reuters or the New York Times. I agree, the integration possibilities of Getty’s service with the services of those companies deserve serious consideration. (All those private equity firms who now want to hire me as a consultant will find my contact information in the About Us section of the site.)
One final point: The hypothetical buy-out deal cited above calls for the private equity firm to borrow a substantial portion of the purchase price. In the current environment, that’s not easy. The New York Times mentioned the distinct possibility that capital market conditions may prohibit all of the prospective buyers from sourcing the loans needed to make bids for the company. If no bids come through, where would that leave Getty? The news of the talks with Goldman Sachs must have rattled the rank and file employees. I suspect many of them have already updated their resumes. That news has also brightened the stock. Before the announcement, the stock had dipped into $22 territory, but it has since come back up to $25. If no deal comes to pass, however, the stock is bound to sag again. Further, Getty will have to add work-force morale issues to the list of conditions contributing to its perfect storm.
CF
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Related Stories:
Getty Images confirms that it is exploring strategic alternatives (January 22, 2008)
NY Times reporting Getty Images may be up for sale (January 21, 2008)
Posted in: Editorials, Getty Images, Stock Photo Companies
